Report provides an overview of the shift of economic growth in Indochina from historically unipolar growth centred around Thailand, to increasingly multipolar growth encompassing Vietnam, Myanmar, Cambodia and Laos.
C Index Value % chg Thailand 1,593.1 -0.89 Vietnam 512.4 2.43 Laos 1,367.3 0.00 Cambodia 679.6 0.00 Source: Bloomberg Valuation P/E P/B Thailand 14.6 2.4 Vietnam 12.6 2.2 Laos 7.7 1.4 Cambodia 18.4 n/a Source: Bloomberg, KT Zmico estimates Currency USD:x % chg Baht (THB) 29.9 -0.37 Dong (VND) 21,000 0.00 Kip (LAK) 7,666 0.64 Riel (KHR) 4,065 0.00 Kyat (MMK) 951 0.76 Source: Bloomberg Graeme Cunningham, CFA KT ZMICO Indochina Research Head of Indochina Research [email protected]66 (0) 2624 - 6350 Chayanee Juengmanon KT ZMICO Indochina Research Analyst [email protected]66 (0) 2624 - 6351 Indochina Research Why Indochina, why now? Indochina is currently undergoing an unprecedented period of economic expansion and integration that we believe is a secular trend that will drive rapid growth throughout the next decade. We view Thailand as the model for what the rest of the region can eventually become, with Vietnam already well down this path, and the frontier markets of Myanmar, Cambodia and Laos in the very early stages of this material shift in living standards. All five countries have political, demographic and natural resource strengths that will continue to propel a long-term secular growth trend. Strong demographics, political stability, robust growth Indochina has a young, rapidly growing, increasingly well educated, healthy and urbanizing population of 240.6mn which will drive economic growth through a significant increase in the size of the labour force. The region has also seen increasing political stability between, and within, these countries on the whole over the last decade. The financial systems of Indochina continue to develop rapidly, with the three frontier markets still to enjoy a major secular rise in loan/GDP ratios. All these conditions are expected to continue to drive economic growth in the region. Abundant natural resources The economies of Indochina are natural resource rich. All the countries have a major sustainable competitive advantage in agriculture, and some have already become world leading agricultural exporters. All of the countries have substantial mineral resources, and four of the five have large levels of fossil fuel reserves. The region also has abundant natural resources to drive hydroelectric power, and islands that will be attractive as tourist destinations. Improving infrastructure, strong manufacturing The region is undergoing a major overhaul of its energy and transportation infrastructure, and will become increasingly connected over the next decade through major road and railway projects. This is especially important for the three frontier markets, which have suffered from aging or nonexistent infrastructure. This will support the region’s growing popularity as a manufacturing base, with international firms already active in Thailand and Vietnam, and now looking to Myanmar, Cambodia and Laos to support or expand on their existing Indochina operations. Avenues for investment There are equity markets in four out of five Indochina countries; Thailand, Vietnam, Cambodia and Laos, and these represent one of the easiest ways for investors to gain exposure to the region. While Thailand and Vietnam have several hundred listings each, Laos has just two stocks (although eight more are expected over the next two years) and Cambodia just one, while Myanmar only plans to open its stock market in 2015. However, there are listed companies on foreign exchanges whose earnings have significant exposure to these three frontier markets, and investors can also gain access through private equity funds active in the region. Indochina: The Great Integration May 29, 2013
Transcript
C
Index Value % chg
Thailand 1,593.1 -0.89
Vietnam 512.4 2.43
Laos 1,367.3 0.00
Cambodia 679.6 0.00
Source: Bloomberg
Valuation P/E P/B
Thailand 14.6 2.4
Vietnam 12.6 2.2
Laos 7.7 1.4
Cambodia 18.4 n/a
Source: Bloomberg, KT Zmico estimates
Currency USD:x % chg
Baht (THB) 29.9 -0.37
Dong (VND) 21,000 0.00
Kip (LAK) 7,666 0.64
Riel (KHR) 4,065 0.00
Kyat (MMK) 951 0.76
Source: Bloomberg
Graeme Cunningham, CFA KT ZMICO Indochina ResearchHead of Indochina [email protected] (0) 2624 - 6350
Why Indochina, why now? Indochina is currently undergoing an unprecedented period of economic expansion and integration that we believe is a secular trend that will drive rapid growth throughout the next decade. We view Thailand as the model for what the rest of the region can eventually become, with Vietnam already well down this path, and the frontier markets of Myanmar, Cambodia and Laos in the very early stages of this material shift in living standards. All five countries have political, demographic and natural resource strengths that will continue to propel a long-term secular growth trend.
Strong demographics, political stability, robust growth Indochina has a young, rapidly growing, increasingly well educated, healthy and urbanizing population of 240.6mn which will drive economic growth through a significant increase in the size of the labour force. The region has also seen increasing political stability between, and within, these countries on the whole over the last decade. The financial systems of Indochina continue to develop rapidly, with the three frontier markets still to enjoy a major secular rise in loan/GDP ratios. All these conditions are expected to continue to drive economic growth in the region. Abundant natural resources The economies of Indochina are natural resource rich. All the countries have a major sustainable competitive advantage in agriculture, and some have already become world leading agricultural exporters. All of the countries have substantial mineral resources, and four of the five have large levels of fossil fuel reserves. The region also has abundant natural resources to drive hydroelectric power, and islands that will be attractive as tourist destinations.
Improving infrastructure, strong manufacturingThe region is undergoing a major overhaul of its energy and transportation infrastructure, and will become increasingly connected over the next decade through major road and railway projects. This is especially important for the three frontier markets, which have suffered from aging or nonexistent infrastructure. This will support the region’s growing popularity as a manufacturing base, with international firms already active in Thailand and Vietnam, and now looking to Myanmar, Cambodia and Laos to support or expand on their existing Indochina operations.
Avenues for investment There are equity markets in four out of five Indochina countries; Thailand, Vietnam, Cambodia and Laos, and these represent one of the easiest ways for investors to gain exposure to the region. While Thailand and Vietnam have several hundred listings each, Laos has just two stocks (although eight more are expected over the next two years) and Cambodia just one, while Myanmar only plans to open its stock market in 2015. However, there are listed companies on foreign exchanges whose earnings have significant exposure to these three frontier markets, and investors can also gain access through private equity funds active in the region.
Why Indochina, and why now? The five nations of Indochina; Thailand, Vietnam, Myanmar, Laos and Cambodia, are currently undergoing a major economic integration, which we expect will help drive economic growth for the region. The two nations further along their path of development, Thailand and Vietnam, will benefit from access to new markets and natural resources, while the rising frontier markets of Myanmar, Cambodia and Laos will benefit from the transfer of technology and training, with the three expected to leave ‘least developed nation’ status behind them within the next decade.
1) Demographics supportive of growth Indochina has demographics very supportive of growth. The population of the entire region is expected to grow at 1.2% on average from 2013-2020 (IMF), well above developing world levels, and the populations are very young, with 60% under age 35. Education and life expectancy levels have also been rising significantly in these countries over the last decade, creating a better trained and healthier workforce.
2) Increasing political stability, improving legal systems Political stability is increasing in Indochina. The biggest shift has been the political and economic opening, both regionally and globally, of previously isolated Myanmar. Stable one party rule in Vietnam and Laos has continued for nearly 40 years, and the ruling party in Cambodia has a majority which has only grown in strength since it took power in the late 1980s. Politics in Thailand has cooled significantly since the election of Yingluck Shinawatra in 2011. As well as the improvement in domestic politics for the five, intraregional cooperation is improving, and should continue to do so as the countries join the ASEAN Economic Community in 2015.
3) Strong economic growthIndochina is expected to enjoy strong economic growth over the next five years. From 2012E-2017E, the IMF expects Thailand’s annual real GDP to grow 4.9%, Vietnam, 5.3%, Myanmar, 6.6%, Cambodia, 7.1% and Laos, 7.9%. Thailand had laid the path that the other four are now following; building first on agricultural strengths, shifting into manufacturing, especially for exports, and gradually moving towards a knowledge economy. Vietnam is well down this road, while the three other frontier markets are still just shifting away from roots in subsistence agriculture, and have still to enjoy all the productivity gains and economic growth that such a transformation entails.
4) Improving financial systems Thailand’s financial system (now fully recovered from its late 1990s problems) is again the model for the rest of Indochina, and is well developed with a mature banking system with most modern services and products, and developed capital markets, including a large equity exchange. The Vietnam banking system is going through growing pains similar to Thailand in the 1990s currently, but we believe that it will emerge stronger from the current problems. Banking for the three Indochina frontiers is still in its very early stages, with a huge wave of new entrants, and basic services like ATMs widely available only over the last few years. These three markets should enjoy a major secular improvement in total credit/GDP, which stands at between 26-34%, compared to 151% for Thailand and 132% for Vietnam.
Currency regimes and inflation levels vary across the five countries. The Thai baht and the Lao Kip (connected through high levels of trade) have appreciated significantly over the last several years. The Cambodia Riel is pegged to the dollar, while the Vietnamese Dong and the Myanmar Kyat have seen material devaluations over the past several years. Although currently inflation is benign across the region, Myanmar, Vietnam, and Cambodia have all been prone to inflation in recent years, in contrast to the central banks of Thailand and Laos, which have been vigilant against rising prices.
5) Abundant natural resources Indochina possesses abundant natural resources. All five countries have a sustainable competitive advantage in agricultural production, and Thailand and Vietnam are global leaders in rubber and rice exports, and it is expected that Myanmar will soon be a major player for the latter. Although smaller in absolute terms, Cambodia and Laos are expected to be reasonably prominent future agricultural players relative to their size, the former potentially for rice, and the latter for coffee. The shift of technology and modern agricultural methods between more developed Thailand and Vietnam and the three frontier markets should help propel this trend.
KT-Zmico Indochina: The Great Integration 4
All of the five countries have significant mineral reserves, and all but Laos have major fossil fuel deposits. Especially in the case of the three frontier markets, modern mineral resource exploitation is still in its early stages, and the chance for upside surprises from mineral finds is high. While Thailand’s fossil fuel reserves are declining, Myanmar (already a major exporter of natural gas to Thailand) is likely to see major increases in proven reserves in the coming years, and become a major fossil fuel exporter to the region. Vietnam has doubled its oil reserves in the last decade.
Cambodia is also expected to have material offshore oil reserves, and although it has no proven reserves yet, it could become an important source of supply, especially for neighboring Thailand and Laos. Although Laos has no fossil fuels, it does have abundant river resources, and is building out hydroelectric capacity well in excess of domestic needs as it becomes the ‘battery of Indochina’. Vietnam also has major hydroelectric projects underway and Myanmar has substantial untapped potential for hydroelectric capacity.
Another ‘natural resource’ for all five countries are their tourist attractions, which especially in the case of Myanmar, Cambodia and Laos, have barely begun to be developed. Thailand here again is the blueprint for tourism potential in Southeast Asia, with the country’s islands now world renowned tourist destinations.
6) Regional infrastructure uniting the region Indochina is currently undergoing a historical shift in region-wide transport infrastructure. Even just ten years ago, the nations were relatively isolated from each other given a lack of developed transportation infrastructure especially in Myanmar, but also in Laos and Cambodia. Ongoing major road and rail projects are expected to create unprecedented ease of travel and goods flow across Indochina and should offer a permanent reduction in the cost of doing business.
7) Growing manufacturing base Thailand has been a destination of choice in Southeast Asia for global manufacturers looking for a production base with a well trained, lower cost labour force, reliable infrastructure and openness to foreign investment. Vietnam has already begun to follow in Thailand’s footsteps in developing these attributes, and Laos and Cambodia have just in the last two years seen global manufacturers begin to locate production there. Myanmar is at an even earlier stage, having only opened to foreign investment over the last six months. Although there has been recent material hikes in minimum wage rates in Thailand, on the whole the region remains competitive in terms of wages.
8) Early stage consumer markets Thailand has a reasonably advanced consumer market of 64.5mn, and again points the way for the development of the consumer market in the rest of Indochina. With the relatively new modern consumer market of Vietnam (the largest population in Indochina), adding 90.4mn consumers, combined with the three frontier markets, Myanmar, with 65.0mn, Cambodia, with 15.3mn and Laos with 6.7mn, Indochina taken as a whole becomes a formidable total 240.6 million consumer market. This is bigger than Indonesia, and a fifth the size of the Chinese or Indian markets.
9) Avenues for investment There are many avenues for investment in Thailand, with developed equity, bond and futures markets, as well as mutual funds. Investors can access Vietnam’s market through both the equity market and private equity funds, although there is no shorting permitted in the market.
Laos opened its equity market just two years ago in 2011 with two stocks, and Cambodia just a year ago, with a single listing, so choice is currently limited. However, the former is expected to have several new listings over the next two years, and the latter will expand its equity offering by one to two names. There are also foreign listed plays with exposure to these two markets.
Myanmar currently targets 2015 for the opening of an equity market that will be accessible to foreigners. For all three of the frontier markets, there are also private equity funds accessible to investors that are beginning to expand their holdings in Indochina.
The Great Integration
KT-Zmico Indochina: The Great Integration 5
The Great Integration
Figure 1: Indochina comprises Thailand, Vietnam, Myanmar, Cambodia and Laos
Source: International Monetary Fund, *Total population 2012
64.5 mn*
90.4 mn*
15.3 mn*
6.7 mn*
63.7 mn*
Figure 2: Population by age segment Figure 3: Population growth
Demographics supportive of growth Indochina’s demographics are strongly supportive of economic growth over the next five to ten years. The population is young and rapidly growing, as well as becoming increasingly healthy and well educated. The population is also shifting from a still large concentration on rural subsistence agriculture (especially in Myanmar, Cambodia and Laos) to urban centers, which will both grow the labour market as well as the consumer market. These secular trends all still have a few decades to run, and are the core of the growth story from Indochina.
Indochina market larger than Indonesia, one-fifth the size of India, ChinaTwenty years ago, when development in Indochina was mainly only a Thailand story, with less than 60mn people, it appeared small in the regional context of neighbors China, India and even Indonesia. However, with the development of Vietnam over the last ten years, with a 90.4mn population as of 2012, and the recent economic revival of Cambodia, with 15.3 mn citizens, Laos, with 6.7mn and especially Myanmar, with 63.7mn, the total market of 240.6mn is beginning to look far more substantial. This market is larger than Indonesia and about one-fifth the size of both India and China.
Young, rapidly growing population Indochina is also very young (Figure 2). For all five countries, at least 60% of the population is under 35, and for the three frontier markets, Cambodia, Laos and Myanmar, 50% of the population is under 25. Indochina is growing rapidly in a global context, with the IMF expecting 1.2%/year population growth versus the region from 2013-2017, above the 1.0% growth forecast for the US, 0.5% for China, just 0.2% for Europe and a -0.3% population decline in Japan.
Myanmar, the least developed country in Indochina, is expected to see the highest growth, up 2% over the next five years, with Laos at 1.7%, Vietnam at 1.2% and Cambodia at 0.9% (Figure 3). Thailand has an expected population growth of just 0.6% yoy, in keeping with its higher level of development, which tends to be accompanied by falling birth rates.
Increasing urbanization and the rise of the mega-cityAnother demographic trend is increasing urbanization, with Indochina’s mega cities already having absorbed a significant proportion of the population, providing businesses with a large labor pool. 1) Bangkok in Thailand has a population of over 8mn, (12% of the total population), 2) Ho Chi Minh City and Hanoi in Vietnam both have over 6mn residents each (accounting for 13% of the population combined), 3) Cambodia’s largest city Phnom Penh holds 2mn (15% of the population), 4) Laos’ capital Vientiane has about 800k residents (12%) and 5) Myanmar’s main center of commerce, Yangon, has grown to over 4mn (6%).
Even so, with much of Vietnam, and the majority of the populations of Myanmar, Cambodia and Laos still subsistence agriculturalists, we believe that the urbanization trend has decades to run, especially from growth in smaller provincial cities.
KT-Zmico Indochina: The Great Integration 7
Demographics supportive of growth
Thailand
Vietnam
Myanmar
Cambodia
Laos
0% 20% 40% 60% 80%
2000 2010
Thailand
Vietnam
Myanmar
Cambodia
Laos
0% 13% 25% 38% 50%
2000 2010
Source: World Bank, *as percentage of eligible demographic
Figure 6: Secondary school enrollment* Figure 7: Tertiary school enrollment*
Source: World Bank
Thailand
Vietnam
Myanmar
Cambodia
Laos
0 20 40 60 80
1980 2010
Thailand
Vietnam
Myanmar
Cambodia
Laos
0 85 170 255 340
2000 2010
Figure 4: Life expectancy Figure 5: Health spending/capita (US$)
Measures of health improving dramatically The last 30 years have see a material increase in health in Indochina, with improved medical systems, falling infant mortality and increased availability of pharmaceuticals. Life expectancy in Indochina has risen considerably since 1980, with the figure for Vietnam, Cambodia and Laos rising 19, 24, and 18 years respectively, and 8 and 9 years for Thailand and Myanmar (Figure 4). Meanwhile per capita health spending has grown by a multiple of between 3x to 5x from 2000 to 2010 for the region (Figure 5).
Levels of education improving materially Education levels in Indochina have also continued to rise, as shown by secondary school enrollment as a percentage of the eligible age group (Figure 6). Thailand, Vietnam, and Myanmar and Laos all gained between 10-15 percentage points in this measure over the last decade, while Cambodia improved the most, up from 18% to 46%. Gains in tertiary education have been especially strong in Cambodia and Laos, which have only introduced higher schooling to any scale in the last decade (Figure 7). Thailand’s near 50% completion of tertiary education suggests that there are still large gains in tertiary school completion to come for Indochina.
Demographics will support secular growth trend for decades What this data combined suggests is a large increase the in size and quality of the labour force in Indochina over the next few decades, and an accompanying large increase in the consumer markets in these countries. Although in Thailand some of the gains from these secular trends have been realized, certainly in Myanmar, Cambodia and Laos, they are wholly in their infancy, and even in Vietnam, they have considerable room to run. Although these economies are certain to see short-term cyclicality as they expand (an example would be Vietnam’s current slowdown), the underlying secular trends remain extremely supportive of long-term growth.
KT-Zmico Indochina: The Great Integration 8
Political, legal systems stabilizing
Source: Respective governments
Country System Ruling party
Thailand Constitutional Monarchy Yingluck Shinawatra’s Puea Thai has majority
Vietnam Single Party Socialist Republic Communist Party of Vietnam has ruled since 1976
Myanmar Unitary Presidential Constitutional Republic Military-backed Union Solidarity and Development Party
Cambodia Constitutional Monarchy Hun Sen’s Cambodia People’s Party maintains strong majority
Laos Single Party Socialist Republic The Laos People’s Revolutionary Party has ruled since 1975
Figure 8: Political system, ruling party
Increasing regional political and legal stability Indochina has seen increasing political and legal system stability over the last decade. Thailand’s politics have stabilized after turmoil through the second half of the 2000s, Myanmar in 2012 reopened to the world after over a three decade isolation, Cambodian politics, still very volatile as late as 2003, has seen a decade of peace with rule consolidated under Hun Sen. The political situation in the one party socialist republics of Vietnam and Laos has been stable since at least the 1990s (Figure 8).
Legal systems see improvements over last decadeAlthough the legal systems, especially of the frontier Indochina markets of Myanmar, Cambodia and Laos, are still developing, and many new laws, especially related to foreign investors, are still being tested in the courts, rule of law has improved over the last decade. Thailand and Vietnam have comparably well developed legal systems to the other three markets. However, in general we must still characterize rule of law as relatively loose in Indochina in general in comparison to other regional countries like Singapore.
Myanmar investment law the most significant recent legal development Possibly the most significant legal event in Indochina in many years was the passing of Myanmar’s foreign investment law in September 2012. This law has given international investors much greater clarity on doing business in the country, and there have been several foreign entrants weekly since Q4/12 announcing intentions to establish operations in the country.
Thailand politics cools following Yingluck Shinawatra’s election in 2011 Thailand saw a half decade of political tension after the ouster of Prime Minister Thaksin Shinawatra from power in a military coup in 2006. Thaksin’s support base was mainly the rural, agricultural North and Northeastern provinces. His party was replaced by the Democratic party, popular in Bangkok, and the southern provinces, after large demonstrations by Democrat supporters and parties dissatisfied with reported corruption by the Thaksin government.
Political tensions continued to rise in the next four years, culminating in widespread demonstrations by pro-Thaksin supporters which erupted in violence in 2010. However, politics have cooled since Thaksin’s sister, Yingluck Shinawatra was elected in mid-2011. This offered a degree of compromise between those adamant that Thaksin himself would not return to the country, but at the same time appeased the North and Northeastern provinces’ that had objected to their democratically elected choice being ousted.
Power in Cambodia consolidates under Hun Sen over the last decade Cambodia had endured three decades of civil war with several competing factions, including the Khmer Rouge, royalists, and various parties under Vietnam-supported Hun Sen, from 1970 until the late 1990s. Hun Sen eventually fully consolidated power around 2003. Although officially a constitutional monarchy, the king reigns, but does not rule, and Hun Sen’s Cambodia People’s Party (CPP) has a strong majority control of the house and senate and the small opposition parties have little practical power. The most common political disputes are land issues directly between corporations and the public, and the population on the whole appears relatively satisfied with CPP rule.
KT-Zmico Indochina: The Great Integration 9
Political, legal systems stabilizing
Tensions between Cambodia and Thailand have cooled Cambodia and Thailand have had the only armed conflict between two Indochina nations in the past decade, with violence erupting twice at a disputed border in Preah Vihear province, linked to tensions between the Democrat government and the Cambodia People’s Party. These tensions appeared to have diminished after the Yingluck Shinawatra government came to power, with her brother Thaksin Shinawatra having historically had good relations with Hun Sen and Cambodia.
Stable one party systems in Vietnam and Laos for over four decadesVietnam and Laos are both single party socialist republics, which gained power in the mid-1970s following the end of the Vietnam war, and have ruled since. Political stability has increased since the end of the cold war in 1989-1990. Similar to China, both parties have allowed for a market economy to flourish, while still maintaining single party control.
Surprising and fast-paced economic and political reforms in Myanmar Of all the recent political shifts in Indochina, that of Myanmar has been the most dramatic. The military regime that had kept the country isolated from the international community has, over the last two years, implemented surprising and impressive economic and political reforms, which seem to have only gained pace especially from mid-2012. The regime has opened its economy to increased foreign investment after a key investment law was passed in late 2012, and the military backed ruling Union Solidarity and Development party are now acknowledging an opposition party, lead by Aung Sang Suu Kyi.
Myanmar finally integrating more fully with Indochina, ASEAN, and the worldAlthough already part of ASEAN for many years, given the extensive sanctions imposed by most major Western nations prior to the recent political and economic reforms, Myanmar was the only corner of Southeast Asia that remained economically and politically detached from the international system. With Myanmar now back on board, and with its adundant natural resources and potential as a manufacturing base, we believe that its economic awakening will have strong reverberations throughout Southeast Asia.
Tensions in Myanmar between the core and peripheryWhile its regional and international relations have improved dramatically, the internal political tensions in Myanmar make Thailand’s domestic issues look relatively minor. The country has ongoing conflict between the ethnically Burmese core of the country, and its ethnically diverse periphery. Ethnic violence has erupted over the last six months against between Buddhists and Muslims in Western and Central Burma, and armed conflict continues with rebels in Kachin State in the North. These tensions are unlikely to be easily resolved and will remain a perpetual feature of Myanmar’s internal politics in our view.
ASEAN integration continues In addition to the improving bilateral relations generally in Indochina, regional integration continues, with all five countries to join the ASEAN Economic Community, which will significantly reduce tariffs and effectively create one large Southeast Asian market. Combined with the major improvement in Indochina-wide infrastructure, and the large potential gains from growing intraregional trade, we expect that Indochina has considerable impetus to continue to drive this ongoing regional integration.
KT-Zmico Indochina: The Great Integration 10
Strong economic growth
Source: International Monetary Fund
Nominal GDP
(US$ bn)
GDP (PPP Int’l
$ bn)
GDP/Capita
Nominal (US$)
GDP/Capita
PPP (Int’l $)
Thailand 366 652 5,678 10,126
Vietnam 138 321 1,528 3,548
Myanmar 53 89 835 1,405
Cambodia 14 36 934 2,402
Laos 9 19 1,446 3,011
World 71,707 83,140 n/a n/a
ThailandVietnam
Laos Cambodia Myanmar
China US
EU-27Japan
0% 2.8% 5.5% 8.3% 11.0%2006-2011 2012E-2017E
Figures 9: Gross domestic product (2012) Figure 10: Real GDP growth
Changes to come in Indochina’s relative GDP rank Indochina is in the early stages of what is likely to play out as a significant reordering of the relative economic size of the five nations. Thailand has been by far Indochina’s largest economy by decades, but relative gains by others in the region have begun. Vietnam, at a 2011 nominal GDP of US$123bn, is now one-third the size of Thailand’s US$346bn nominal GDP, but on a purchasing power parity basis, Vietnam is already half the level of Thailand. Given that Vietnam’s population is 50% larger than Thailand, it is expected to eventually become the largest economy in the region (Figure 9). Myanmar likely to make to largest gains in share of GDP However, the biggest absolute gains in GDP share are likely to be made by Myanmar, with a population similar to Thailand. Given their relatively small populations, Cambodia and Laos will maintain their number four and five largest positions, respectively. However, looking at Laos in GDP/capita terms rather than based on absolute size shows that the country is only just behind Vietnam in terms of GDP/capita, and nearly double the levels of Cambodia and Myanmar.
Strong economic growth expected for Indochina in next five years Indochina is forecast to have continued rapid economic growth in the next five years, with growth well ahead of the largest developed economies of the EU, US and Japan, driven by a combination of factors;
1) Strong demographics: The demographic factors discussed above, including a young, increasingly well educated and healthy population.
2) Urbanization: Urbanization should continue to gain pace.
3) Industrialization: A continued shift away from subsistence agriculture in Myanmar, Cambodia, and Laos towards industrializing economies (and the continuation of this trend, already underway, in Vietnam) and the major gains in productivity that this entails.
4) Low wages, FDI encouraged: Relatively low wages combined with governments encouraging international investors looking to establish manufacturing bases.
5) Improving infrastructure: Massive improvements in transport and energy infrastructure which will lower costs significantly for both.
We believe that these factors will support IMF estimates for growth in Laos and Cambodia of above 7%, Myanmar above 6%, and for Thailand above 5%, per year, from 2013E-2107E (Figure 10). We believe that the Myanmar estimates especially have room for an upside surprise over the next several years. Vietnam is the one country in Indochina seeing material downgrades in recent month, with the IMF cutting its GDP forecast for 2013 to 5.2% from 5.9% previously. We believe that although the Vietnamese economy is in a cyclical downturn medium term, the long-term secular growth story along with the rest of Indochina remains intact.
KT-Zmico Indochina: The Great Integration 11
Strong economic growth
Government Deficit/GDP
Trade Deficit (Surplus)/GDP
Thailand 1.3% -3.9%
Vietnam 3.8% 3.0%
Myanmar 4.9% 2.8%
Cambodia 2.8% 6.4%
Laos 3.9% 20.2%
Source: World Bank, IMF
Cambodia
Laos
Myanmar
Thailand
Vietnam
0% 40% 80% 120% 160%
2000 2011
Figures 12: External debt to GDP Figure 13: Twin deficits (Avg. 2008-2011)
Source: International Monetary Fund
Indochina living standards gaining versus the world average Indochina’s standard of living based on purchasing power parity GDP/capita has clearly been gaining versus the world average (Figure 11). While Thailand is expected to converge to 88% of the global average by 2015E, the other four countries are expected to double their share of average GDP/capita from 2005-2015E. This shows that productivity in the region continues to grow at above the global average, and that Indochina consumers are seeing a relative increase in their living standards versus the world, and seeing purchasing power increase significantly.
Government debt declining External debt has historically been a significant issue for all of Indochina, as most of the countries have had to borrow heavily in their early development. However, over the last decade, rapidly growing GDP levels have made the debt much less onerous versus GDP, for all the countries except Vietnam, which saw a marginal uptick in external debt/GDP over the decade (Figure 12). Still, external debt to GDP levels appear manageable on the whole. Laos currently has the biggest risk of a rise in this ratio, with two newly planned high speed railways possibly doubling its external debt.
Twin deficits, but investing for growth Most of the countries in Indochina run twin government and trade deficits, apart form Thailand which runs a trade surplus (Figure 13). However, the history of developing countries suggests such deficits are not necessarily a problem as long as they fund future growth, and this appears to be the case in Indochina. Much of the government deficits fund infrastructure projects, which are expected to lower business costs across the region. The trade deficits (which imply a capital inflow by definition), show investment capital flowing into the country, and the bulk of the imports to these countries comprise materials and machinery critical to propelling economic growth.
Currency to US$ (5-year chg) 8.6% -22.9% -0.5% 11.5% -99.3%
Figure 14: Banking, monetary statistics
Thailand’s financial system developed, Vietnam sees growing pains Thailand is the only country in Indochina with a fully developed banking system. Although Vietnam’s financial system is improving, it is currently going through medium-term growing pains (similar to Thailand 1997), as it adopts international standards and deals with growing NPLs related to an over expansion of credit in the late 2000s. For these two markets, the secular bank credit/GDP ratio has already peaked, and appears to oscillate around an average of 130%, depending on the stage of the economic cycle.
Significant period of secular loan growth still to come for Indochina frontiersHowever, for the three Indochina frontier markets, this secular trend in bank credit/GDP growth has considerable room to run. In 2011, the bank credit/GDP ratio was just 34% in Cambodia, 29% in Laos, and 26% in Myanmar, (Figure 14). Thailand and Vietnam both took over twenty years for the loan/GDP ratio to reach its peak from the current levels seen in frontier Indochina (Figure 15).
This suggests to us that the very rapid average annual growth in bank credit from 2007-2011 for Laos, up 55% per year, Cambodia, rising 39%, and Myanmar, growing 32%, is not necessarily indicative of excessive speculative lending (Figure 16). It may rather reflect the strong fundamental demand for rising credit from countries going through an unprecedented increase in productivity.
Although we are likely to eventually see the type of downward cyclicality in these banking systems that we are seeing in Vietnam currently, we do not believe that we have entered unsustainable-credit-boom territory yet for the three Indochina frontier markets.
KT-Zmico Indochina: The Great Integration 13
Financial systems expanding rapidly
Source: Bloomberg, Bank of Thailand, Vietnam GSOV, Myanmar CSO, Cambodia MEF, Bank of Laos
60
80
100
120
140
2005
2007
2009
2011
Thailand Vietnam Cambodia Laos
0
2.8
5.5
8.3
11.0
Thailand Vietnam Laos Cambodia Myanmar
Average (2008-2011)
Source: IMF, Asia Development Bank
Thailand
Vietnam
Laos
Cambodia
Myanmar
0% 8% 15% 23% 30%% Average annual chg 2008-2011
Figure 19: Currency to USD Figures 20: Reserves/months of imports
Thailand
Vietnam
Laos
Cambodia
Myanmar
0% 4% 7% 11% 14%Average 2008-2012
Figure 17: Average CPI inflation Figure 18: Money supply growth
Currency and inflation risks vary across the Indochina nationsThe position of the central banks and governments with regards to currency and inflation is one area where Indochina is not yet integrating. Thailand and Laos have relatively prudent central banks, demonstrated by a strengthening of their currencies and a history of only moderate inflation over the last several years. Vietnam, in contrast, appears satisfied to accept currency depreciation and high inflation (it has had two bouts of 20%+ inflation in just the last four years) to meet other policy goals. Cambodia’s monetary policy is limited by its peg to the US dollar and lack of a bond market, and it has had periods of high inflation in its recent history.
Shift in central bank management for Myanmar leaves question mark It is still unclear which way Myanmar will head on these issues. The country massively devalued its exchange rate in 2012 from US$:Kyat6 from US$:Kyat800 to bring it more in line with existing black market rates. Myanmar has also faced major historical inflation. The central bank is expected to become independent of the government this year, and the composition of its staff is shifting from primarily military officers more towards trained bankers and economists. Since the election of the current government in 2010, inflation has remained relatively benign although the currency has declined.
Varying levels of foreign reserves Foreign reserve levels vary across Indochina. Thailand and Myanmar both have reasonably high levels of reserves, at 8.2 and 10.0 months of imports, respectively. In Cambodia and Laos reserve levels remain moderate at about 6 month of imports each (although some data sources showing higher imports for Laos than implied by these World Bank figures would put this ratio lower for Laos). Reserves in months of imports is the lowest in Vietnam, at just 2.2 months.
KT-Zmico Indochina: The Great Integration 14
Capital markets developing
75
93
110
128
145
01/0
5
31/0
5
30/0
6
30/0
7
29/0
8
28/0
9
28/1
0
27/1
1
27/1
2
26/0
1
25/0
2
27/0
3
26/0
4
Thailand Vietnam LaosCambodia KTZ Indochina
4
9
14
19
24
01/0
5
31/0
5
30/0
6
30/0
7
29/0
8
28/0
9
28/1
0
27/1
1
27/1
2
26/0
1
25/0
2
27/0
3
26/0
4
Thailand Vietnam LaosCambodia MSCI World
Figure 22: Relative performance Figure 23:Regional price to earnings
Source: Bloomberg
Source: Bloomberg, Bank of Thailand, Vietnam GSOV, Cambodia MEF, Bank of Laos
Figure 21: Equity market details
Market Cap (US$’mn)
Market Cap/GDP
Number of listings
Index 12-mth % chg
P/E (x) P/B (x)
Thailand 440,435 1.20 600 1,628 39% 15.0 2.5
Vietnam 41,045 0.90 707 488 10% 11.9 2.1
Laos 1,219 0.20 2 1,366 -13% 7.7 1.4
Cambodia 142 0.10 1 677 32% 18.6 n/a
Four out of five Indochina countries have equity marketsCapital markets are expanding in Indochina, with four out of the five countries (Thailand, Vietnam, Cambodia, Laos) already having equity markets. Thailand has the largest equity market (with a market cap of US$440bn and 600 listings) as well as a bond and futures market, and points the way for the eventual development of the rest of the region. Vietnam’s equity market has risen from just two listings in 2001 to 707 listings currently. Market cap to GDP for Thailand is 1.2x, with Vietnam catching up quickly on this ratio, at 0.9x (Figure 21).
Nascent stock market in Laos and Cambodia, with Myanmar to follow Laos has had its equity market opened for over two years, with two listed stocks, hydroelectric power producer EDL Generation, and the top bank, BCEL. The market has surpassed US$1bn market cap and up to eight new listings are expected over the next two years. Cambodia’s equity market has been opened since April 2012, and although it is still small, with a single listing, PPWSA, with a market cap of US$142mn, two to three more listings are expected over the next two years. Myanmar plans to open a stock exchange by 2015, and is expected to pass a securities exchange law by July 2013, with some companies now undertaking the early stages of the listing process.
Bond and futures markets still to be developed in Indochina Bond and futures markets have not reached all of Indochina yet, with Thailand leading the way with both of these options. Vietnam has a bond market, and a futures market is planned for the end of 2014 currently. Cambodia has no government bonds, and while Laos has some government notes, and has recently issued its first sovereign bond, denominated in Thai baht, there is no bond market. The governments of both countries have announced intentions to open bond markets over the next few years.
We expect that a Myanmar bond market will be some time away, given that the equity market appears to be the first priority, and that is still two years out. We expect that the establishment of futures markets in the three Indochina frontier nations is several years away.
KT-Zmico Indochina: The Great Integration 15
Abundant natural resources
Source: FAO, International Coffee Organization, National trade statistics
Rice exports(‘000
tonnes)
2010 (Rank)
2012 (Rank)
Rubber exports (‘000
tonnes)
2010 (Rank)
2012 (Rank)
Coffee (‘000 bags)
2010 (Rank)
2012 (Rank)
India 2,774 (5) 8,100 (1) Thailand 2,734 (1) 2,999 (1) Brazil 30,214 (1) 28,260 (1)
US 3,528 (4) 3,441 (5) India n/a n/a Ethiopia 3,250 (5) 3,100 (5)
Figure 25: Leading position for global agricultural exports
Source: Food and Agriculture Organization of the United Nations (FAO)
Tonnes Thailand Vietnam Cambodia Laos Myanmar
Rice production 31,597,200 39,988,900 8,245,320 3,070,640 33,204,500
Cassava production 22,005,700 8,521,670 4,247,420 500,090 n.a.
Maize production 4,454,450 n.a. 773,269 1,020,880 n.a.
Rubber production 3,051,780 754,482 37,500 n.a. n.a.
Coffee production 48,955 1,105,700 358 47,052 7,367
Bananas production 1,584,900 1,481,400 159,000 60,500 n.a.
Figure 24: Agricultural production
Material levels of natural resources Indochina has a wealth of natural resources, in the form of abundant agricultural and water resources as well as mineral or fossil fuel deposits. In all the Indochina countries except for Thailand, these resources have been underexploited, and we expect very rapid development of these resources over the next five years, with material levels of capital being directed towards these sectors (in many cases for the first time ever).
Agriculture is a key sustainable competitive advantage for Indochina Agriculture is the key sustainable competitive advantage for Indochina; currently the main crops are rice, cassava, maize, rubber, coffee (Figure 24), as well as seafood, with production in excess of domestic consumption allowing for large agricultural exports. Thailand has been a leading agricultural exporter for decades, and was the largest global rubber exporter in 2012, and number three for rice. Vietnam has just in the last ten years become a global leader for agricultural exports, even surpassing Thailand in 2012 to become the number two rice exporter (Figure 25), and has become the number two global coffee exporter, and is gaining on number one, Brazil.
Myanmar could drive further gains in global rice export market share There is also great agricultural promise in the three frontier markets, especially for rice. Indochina has been increasing its share of global rice exports, from 45% in 2005 to 55% in 2010 (Figure 25), mainly because of the gains in Thailand and Vietnam. We expect that the development of the three Indochina frontiers will further secure the region’s status as the global rice bowl, with gains especially possible from Myanmar.
Myanmar was once the world’s largest rice exporter, but from the production of 33mn tonnes, it exported of just 445k tonnes in 2010. However, it has a similar population, and agricultural land resources to Thailand, which produced 31mn tonnes of rice, but exported 9mn tonnes in 2010. Therefore, we see room for massive rice export expansion from Myanmar, especially given that agriculture and milling capacity have seen very little development for the last four decades, prior to this year.
KT-Zmico Indochina: The Great Integration 16
Abundant natural resources
Source: USDA, FAO Stat
Figure 26: Growing share of global rice exports
Exports Exports Exports Exports Yield/HaYield/Ha
2005 as % global 2010 as % global 2005 2010
Thailand 7,274 26% 9,047 29% 2.6 2.8
Vietnam 5,174 18% 6,734 22% 4.6 5.4
Cambodia 200 1% 750 2% 2.0 2.4
Laos 0 0% 0 0% 2.7 2.4
Myanmar 190 1% 445 1% 2.4 2.6
India 4,569 16% 2,082 7% 3.0 3.2
Pakistan 2,801 10% 4,000 13% 3.0 3.6
US 3,496 12% 3,514 11% 7.8 7.9
Indochina 12,838 45% 16,976 55% 3.4 3.8
World 28,260 31,136 3.9 4.2
Cambodia and Laos could round out the Indochina rice bowl Laos and Cambodia have the ability to become reasonably major rice exporters relative to the small sizes of these economies versus Thailand and Vietnam. Cambodia’s rice exports more than tripled from 200k in 2005 to 750k in 2010, based on FAO Stat figures, but these figures appear to include cross border grey market rice exports to neighboring Thailand and Vietnam. Cambodia’s official estimates likely exclude this grey market, and show milled rice rising nearly thirtyfold from 6,390 tonnes in 2008 to over 180k tonnes in 2012. The government expects a further fivefold increase in this figure to 1mn tonnes by 2015. Although Laos does not export rice currently, assuming rising yields, it could become a net exporter over the next decade.
Frontier markets have potential for several other agricultural products The three frontier markets are also helping Indochina build on its already existing strengths in rubber, coffee, and cassava, with cultivation of these products increasing significantly in these countries over the last five years. All three are seeing new rubber plantations, while Laos already produces as much coffee as Thailand, and has gained popularity for its domestic variety especially in the European market. Myanmar and Cambodia also have the potential to help expand on Indochina’s large share (via Thailand and Vietnam) of global seafood exports.
Room for significant growth in agricultural yields in the frontier marketsWhile Thailand and Vietnam have reasonably high agricultural productivity, using rice yield per hectare as a proxy, with 2.8 and 5.4 tonnes yield per hectare, respectively, Myanmar, Cambodia and Laos, are still facing lower yields at 2.4, 2.4 and 2.6, respectively. However, we expect that rice yields, and agricultural yields and production efficiency will increase especially in the frontier, for several reasons;
1) Agricultural methods and technology can improve significantly: Agriculture in much of Cambodia, Laos and Myanmar is still traditional subsistence farming, and in many areas even basic modern agricultural techniques are not applied. Technology is scarce, and where available, it is generally outdated.
2) Material levels of capital only reaching agriculture in the past few years: The banking systems of these countries have only really developed in the last half decade, and given a lack of collateral (and in some cases even land titles), banks were reluctant to lend to the sector, but this has improved in the last few years.
3) Foreign firms beginning to enter: Foreign agricultural firms, especially from ASEAN, have begun to enter the three frontier Indochina markets in size only in the last few years. We expect that the technology and capital transfer will improve agricultural yields and production efficiency.
Source: USGS (* Laos extracted 86k tons of refined copper and 63k tons of copper concentrate in 2012)
Figures 27: Mineral resource, building materials production
Extensive mineral resources Indochina possesses sizable mineral resource reserves, with many mines in the extraction stage across the region, but also major potential finds expected from continuing exploration. This is especially the case in the three frontier Indochina markets, which have only in the last few years seen much modern mining exploration after decades of under exploration.
Mineral output already high for Thailand, Vietnam and Myanmar Thailand, Vietnam, and Myanmar all have very active minerals industries, extracting copper, gold, lead, tin, maganese and zinc (Figure 27). Thailand and Myanmar also mine silver and gemstones. Of the three, given Myanmar’s previous economic isolation, and relative lack of modern exploration activity, it has the highest probability for upside surprises in terms of finding major new mineral deposits.
Cambodia still in exploration phase, minerals already a key export for Laos Cambodia is the only country in Indochina that does not currently have precious metals or other mineral mines in the extraction phase. However, surveys suggest that there is a high probability of a wide variety of mineral resources, and material levels of capital have only gone into exploration in the last five years. The mining sector in Laos is particularly significant relative to the size of the economy, with mineral exports, mainly of copper, comprising over 50% of exports currently. For both countries we expect that mineral resource extraction will be a significant economic driver long term.
Rivers a key natural resource for hydroelectric expansion Another important natural resource for Indochina is its extensive river system. This is particularly important for the major hydroelectric capacity expansion planned for the region. We cover this expansion more in the section below on energy.
Tourist sites as a ‘natural resource’ We could classify Indochina’s many islands as a ‘natural resource’ that are a main draw of the tourism industry. Thailand has already demonstrated the potential for the development of Indochina islands into world-renowned destinations, and Vietnam has begun to develop its islands and grow its tourism industry. Both Cambodia and Myanmar have a large group of virtually untouched islands that are prime for development. Even landlocked Laos has ‘4,000 islands’ within its river system.
KT-Zmico Indochina: The Great Integration 18
Energy reserves and capacity rising
Source: US Energy Information Administration, BP, Myanmar Central Statistics Organization
Gas (bn cubic feet) Thailand Vietnam Myanmar
Gas reserves 10,584.6 21,784.0 7,804.9
Gas production 1,280.9 289.6 421.0
Gas consumption 1,592.0 289.9 118.0
Gas reserves life (year) 8.3 75.2 18.5
Oil (mn bbls)
Oil reserves 430.0 4,400.0 50.0
Oil production 125.9 119.7 7.6
Oil consumption 394.2 130.7 17.2
Oil reserves life (year) 3.5 37.6 6.6
Coal (mn tonnes)
Coal reserves 1,239.0 150.0 2.0
Coal production 18.5 44.7 1.5
Coal consumption 35.3 23.3 1.6
Coal reserves life (year) 67.1 3.4 1.3
Indochina energy industry undergoing material transformation The energy industry in Indochina is currently undergoing a material transformation, and the large current gap between Thailand’s energy sector (with its large oil, gas and coal production, large refinery industry, strong hydroelectric sector and countrywide grid) and the rest of Indochina should contract considerably over the next decade. All four of Thailand’s Indochina neighbors are in the process of a major increase in hydroelectric capacity, while Vietnam and Myanmar are expected to see major expansions of their fossil fuel industries. Cambodia has the potential for development of oil and gas, although its has no proven reserves yet. Laos has no fossil fuel potential, but it has the strongest hydroelectric story in the region.
Thailand fossil fuel reserves declining Thailand is the largest consumer of fossil fuels in Indochina, but remains heavily reliant on imports for energy generation as its reserves decline, with oil and gas representing about 70% of energy consumption. Oil consumption is 394mn bbls/year (versus 131mn bbls/year for Vietnam), compared to production of just 126 bbls/day, and gas consumption is 1,592bn cubic feet/year versus just 1,281bn cubic feet of production. Oil reserves have declined from over 600mn bbls in 2001 to 430mn bbls as of 2011 (for an oil reserves life of just 3.5 years), and gas reserves have dropped from 11.7 trn cubic feet to 10.6 trn cubic feet (for a reserves life of just 8.3 years).
Thailand’s coal consumption is a relatively minor 10% of total energy consumption, with consumption at 35.3mn tonnes/year at about twice the level of its 18.5mn tonnes of production, although it has a high coal reserves life of 67 years. Nevertheless, securing fossil fuel imports will become increasingly important for Thailand over the next decade, and access to growing reserves in the rest of Indochina will be a key part of that strategy.
Vietnam’s oil and gas reserves surge, but coal reserves life low In contrast to Thailand, Vietnam has seen proven fossil fuel reserves surge, with oil reserves doubling from 2.2bn bbls in 2001 to 4.4 bbls in 2011 (a 37.6 year reserve life at current levels) and gas reserves tripling from 6.8trn cubic feet to 21.8trn cubic feet over the period (a 72.3 year reserves life). The country will also double its refining capacity to supply 65% of domestic demand (up from 30% currently) by 2017. However, oil and gas comprise only about 50% of total energy consumption, with coal a much larger contributor, at about 30%. Although coal production is 44.7mn tonnes, twice the level of consumption at 23.3mn tonnes, reserves are just 3.4 years, and Vietnam is expected to become a net coal importer this year.
Figure 28: Fossil fuel resources (2011)
KT-Zmico Indochina: The Great Integration 19
Energy reserves and capacity rising
0
6,000
12,000
18,000
24,000
Thailand Vietnam Cambodia Laos Myanmar
2007 2011 2020E
Source: Electricity Authorities of respective countries, US Energy Information Administration
Gas imports
(bn cu.ft.)
Crude oil imports (bbls)
Electricity imports
(bn kwh)
China 577 1,735,079 5.55
India 429 1,194,236 5.61
Malaysia 104 58,575 n/a
Philippines n/a 66,445 n/a
Indonesia n/a 141,773 n/a
Total 1,110 3,196,108 11.16
Figure 29: Hydroelectric capacity (MW) Figure 30: Regional energy demand
Myanmar’s reserves expected to be well above proven levelsCurrently Myanmar’s proven fossil fuel reserves are reasonably small. Natural gas proven reserve estimates range from 7.8trn cubic feet (from BP) to 10.0trn (EIA) to 22.5trn (Myanmar government) for respective reserves lives of 17, 20, and 50 years. Proven oil reserves are only 50mn barrels (a reserves life of 7.6 years).
However, is it widely estimated that Myanmar’s potential reserves are far higher than the current proven reserves, given a limited amount of modern exploration in the country for nearly four decades. With more major regional and international exploration firms entering Myanmar especially over the last year, the potential for large reserves discoveries has risen significantly. Some estimates put the the country’s oil reserves as high as 3.2bn bbls, (a 48.5 year reserves life), and natural gas reserves as high as 89.7trn cubic feet (a 199 year reserves life). Were these estimates to be realized, Myanmar would become a considerable energy powerhouse for the region.
Cambodia also has fossil fuel promise Cambodia has no proven reserves and it imports all of its fossil fuels, but exploration of the country’s offshore and onshore blocks continues. Estimates are that a potential 2.7bn bbls of oil and 13.5trn cubic feet of gas is available, which if realized could make the country a net fossil fuel exporter. There is also an overlapping claims area with Thailand, which is estimated to contain up to 11trn cubic feet of gas, as well as oil. Political tensions between the two countries prior to the election of Yingluck Shinawatra had prevented much progress on developing this area, but there has been some forward motion since the new Thai government took power two years ago.
Laos has no oil or gas, but should see sufficient supply from IndochinaLaos is not estimated to have any fossil fuel resources given its geography (but as shown below, this weakness will be offset by its considerable hydroelectric power potential). Laos’ annual oil and gas consumption could more than easily be supplied by the resources of Thailand, Vietnam and Myanmar, and therefore we believe that it will have little problem in meeting its fossil fuel requirements from within Indochina.
Intraregional energy exports already growing Indochina’s energy industry is becoming increasingly interconnected as the nations are beginning to become each other’s largest customers for energy exports in some cases. For example, 89% of Myanmar’s gas production currently goes to neighboring Thailand. Thailand in turn exports fossil fuels to both Laos and Cambodia. Thailand is also already Laos’ largest customer for electricity exports, while both Vietnam and Thailand export electricity to Cambodia. Regional demand for Indochina energy exports will also drive growth as China and India have high demand for oil and gas imports (Figure 30).
KT-Zmico Indochina: The Great Integration 20
Energy reserves and capacity rising
Major ongoing hydroelectric expansion In addition to the potential gains from fossil fuel resources, Indochina is undergoing a major expansion of its hydroelectric capacity, taking advantage of the region’s large system of rivers. The hydroelectric story will be the biggest game changer for Laos, which under current plans will become a major electricity exporter over the next decade, with river capacity to generate electricity well in excess of domestic needs. Vietnam, Myanmar and Cambodia are also planning major hydroelectric expansions.
Thailand’s planned hydroelectric expansion small in regional context Thailand’s hydroelectric sector is a relatively small proportion of its total electricity generation, at only 15% of the total, with the largest source of electricity generation still natural gas. Although under current plans, hydroelectric capacity will expand a substantial 50% from 5,322MW currently to 8,082MW as of 2020, this is minor compared to the expansion in the rest of the region (Figure 29). The country will continue to rely on natural gas to meet the majority of its electricity demand, with a significant proportion of the gas imports to come from Myanmar.
Vietnam to more than triple hydroelectric capacityVietnam expects to triple its hydroelectric capacity from just 5,500MW currently to 17,400MW by 2020. The government estimates that hydroelectricity will generate around a quarter of the country’s electricity by 2020, although coal-fired thermal generation will still be the main source, comprising 50% of total electricity production. The country will also undertake interconnection projects with the hydroelectric networks of neighboring Laos, Cambodia and China over the next several years.
Laos could see the largest absolute hydroelectric capacity in Indochina Laos’s major hydroelectric expansion is well underway, with the country already an electricity exporter to Thailand. This renewable resource will be a key source of sustainable competitive advantage for the country and regional demand looks set to easily absorb the country’s large planned surplus of electricity generation.
Hydroelectric capacity in Laos is expected to more than double from about 2,600MW as of 2011 to 5,600MW in 2015, and nearly double again to 9,400 MW by 2020. However, these estimates include only projects with clearly established timelines, many of which are already in progress. If we include all the potential projects for which MoUs have been signed, the total installed capacity could reach over 23,000MW by 2020.
Cambodia targets twentyfold rise in capacity by 2020, and nationwide grid Similar to Thailand, Cambodia’s planned growth in hydroelectric capacity is substantial in relative terms, with capacity to rise twenty fold from 207MW in 2012 to 4,133MW by 2020. However, in the context of the absolute capacity growth in the rest of Indochina, especially its much smaller neighbor Laos, Cambodia’s planned capacity appears small. The country will continue to build out its national electricity grid to reach most of the large cities by 2016, as it currently has unconnected nodes from Phnom to the south and Vietnam, in the northwest to Thailand, and at the border with Laos.
Myanmar still faces blackouts, but hydroelectric potential significant Myanmar’s electricity capacity is just 3,461MW currently, of which 2,560MW is hydroelectric. Between the low capacity and the lack of strong reservoirs to hold the country over through the six-month dry season from November to April each year, Myanmar continues to face regular, long, blackouts. However, it is estimated that the current river resources of Myanmar could eventually produce 20,000MW of hydroelectric capacity. We believe that increased foreign interest in the country will especially help drive the development of this capacity.
Hydroelectric expansion should bring down electricity costs for Indochina This increasing shift to hydroelectric power should bring down energy costs for; 1) Cambodia, which generates most of its electricity from diesel oil, the most expensive form of electricity generation, giving it the highest electricity costs in Indochina, 2) Myanmar, which generates most of its electricity from natural gas, and 3) Vietnam, which will see an increasing contribution of electricity generation from hydropower. Hydroelectricity is already the main generator of electricity in Laos, and Thailand’s hydroelectric capacity will remain small compared to its other sources of electricity.
KT-Zmico Indochina: The Great Integration 21
Infrastructure overhaul
Massive ongoing infrastructure improvement Indochina is undertaking an unprecedented improvement in its infrastructure that will bring much of the region from its current state of limited development (eg. dirt roads and dilapidated railways) to complete modernization, over the next decade (eg. expressways and high speed railways), in addition to the massive hydroelectric infrastructure expansion outlined above. The list of the major projects being undertaken is shown in Figure 31.
Thailand investing in high speed rail, airport expansion and roads Compared to the rest of Indochina, Thailand’s infrastructure is relatively well advanced, and investment in the sector has waned over the last decade. The country already has an extensive energy grid, modern highways reaching most areas of the country, ports with large capacities, two international airports in Bangkok, and airports in all major provincial cities. However, the country is expected to spend extensively on upgrading rail infrastructure over the next ten years.
Railway upgrade and southern port expansion the bulk of Thai infra spending Although the citywide rail system of Bangkok is well developed, with a skytrain, subway and commuter train from the center of the city to the Suvarnibhumi airport on the outskirts of the city, the countrywide rail infrastructure is in need of modernization. The majority of Thailand’s spending will therefore be on several high speed rail lines, although it will also develop three new seaports in the south.
The expected cost with the planned lines from Bangkok to; 1) Chiang Mai in the north, 2) Hua Hin in the southwest and 3) Nakhon Ratchasima in the east, is US$23bn (with additional investment to eventually extend a line to the deep south). Another US$8.3bn will be invested over the next decade in a dual track system for most of the country’s railway system. The cost of the three new seaports in the south is expected to total US$171bn.
Vietnam will see major infrastructure upgrade and expansion by 2020Of all the Indochina countries, Vietnam is planning the broadest wave of infrastructure expansion, and by end of the decade the energy, road, rail, port and airport infrastructure will have been largely transformed. From 2011-2015 alone, infrastructure investment is expected to reach US$40bn (we show many of the major planned projects in Figure 31). Previously the state had been behind most of the infrastructure projects in the country, but the material financing requirements for these projects has led the country to also introduce public private partnerships, and build-operate-transfer concessions for potential investors.
Expressways running the length of the countryBy 2020 Vietnam expects to have completed a North-South expressway that will cover the entire length of the country. There are seven expressways planned for Hanoi, with a combined 1,099 km length, and another seven in the south of country, totaling 984km, with 264km of expressways planned for the central region. Ring roads are also planned for Hanoi and Ho Chi Minh City.
Railway upgrade and major Ho Chi Minh airport planned The country’s first priority for the rail system will be to upgrade the major sections of the north to south rail line over the next decade. It also plans to conduct a feasibility study for possible high speed rail lines from Hanoi to Vinh and Ho Chi Minh to Na Trang. Although ongoing improvements and expansions are expected for Vietnam’s 24 airports (of which 10 are international), the largest project by far is the new Ho Chi Minh airport, Long Thanh, located 40 km west of the city. Construction is expected to begin by 2015 and be completed by 2020. The airport will have a 100mn passenger/year capacity and will alleviate pressure on Ho Chi Minh’s current airport, Tan Son Nhat, which is expected to breach its 25mn passenger capacity by 2015.
Major countrywide expansion of port infrastructure Vietnam will also see a major expansion of its port infrastructure over the next decade, and expects between 0.9-1.1mn tonnes of cargo to pass through its ports per year by 2020. At least fifteen different ports in all regions of the country, with capacities ranging from just 5,000 DWT to 100,000 DWT, will be built or improved over the next ten years.
KT-Zmico Indochina: The Great Integration 22
Infrastructure overhaul
Figure 31: Ongoing and planned major Indochina infrastructure projects
Laos Value (US$mn) Thailand (cont.) Value (US$mn)
Rail: High speed rail to China 7,000 Airport: Suvarnabhumi Airport 2,000
Rail: High speed rail to Vietnam 5,000 Energy: Nong-Saeng Natural Gas Power Project 170
Energy: Xayabury Hydroelectric Dam 3,500 Energy: Bangkok Solar Power 539
Energy: Hongsa Lignite 3,700 Energy: SPCG Solar Power 700
Energy: Nam Ngum 3 Hydropower Project 1,125 Port: Pak Bara Seaport 11,780
Energy: Nam Khan 2 315 Port: Chumpon Seaport 1,710
Energy: Xekaman 1 440 Port: Songkla Seaport 3,610
Energy: Nam Ngiep 2 345 Vietnam
Energy: Other small scale dams 200 Rail: Mass Rapid Transit Line 4, Ho Chi Minh City 2,500
Energy: Nam Ngiep 2 345 Rail: Subway Project Number 5, Ho Chi Minh City 1,850
Energy: Other small scale dams 200 Rail: Mass Rapid Transit Line 2, Ho Chi Minh City 1,400
Road: Provincial road projects 209 Rail: Mass Rapid Transit Line 1, Ho Chi Minh City 1,200
Road: Thai Laos bridge 4 (Jun 2013) 45 Rail: Metro Railway Line 3, Hanoi 1,000
Cambodia Rail: Railway Links with Cambodia, Laos 528
Rail: Bangkok Chiang Mai Hi-speed Rail 12,927 Port: Son Duong Deepwater Port 1,200
Rail: Dual track upgrades 8,308 Port: My Thuy Deepwater Port 1,100
Road: Bangpain-Nakhom Ratchasima Motorway 1,490 Airport: Long Thanh International Airport 6,700
Road: Bangyai-Kanchaburi Motorway 901 Airport: Noi Bai International Airport expansion 852
Road: Bangpain Nakhon Sawan Motorway 804
Road: Chonburi-Mabtaput Motorway 292
Source: Southeast Asia Strategic Infrastructure Leadership Forum, press articles
KT-Zmico Indochina: The Great Integration 23
Infrastructure overhaul
Cambodia railway, ports, and roads all being refurbished Cambodia is undergoing a major improvement of its transport infrastructure. There are countrywide road upgrade projects, with paved roads under construction to reach the main cities of even the more remote provinces of the country, and new bridges lowering the time of key transport routes in several provinces.
The country has already seen major progress on a rail refurbishment that has been ongoing since 2010. A southern rail line from the capital city, and main economic center, Phnom Penh, to Sihanoukville, the site of the country’s only deepwater seaport, has already been completed. A line running from Phnom Penh to the northwest border with Thailand is expected to be completed over the next three years. Although it is not as advanced as the high speed rail systems being introduced in Thailand, Vietnam and Laos, it is nonetheless a vast improvement on the previous system, which was unusable on any major commercial level.
The Sihanoukville Port is also undergoing a major expansion (and is expected to be one of the first state-owned companies to list on the stock exchange), allowing it to accept larger ships, and therefore be less reliant on goods first passing through major regional ports before going to destinations further abroad. Phnom Penh Port, the river port in the center of the capital city, has already opened its expansion, 20 minutes outside of the city, which has led to a tripling of the port’s capacity to 300,000 twenty foot equivalents (TEUs)/year.
Laos to become key transport link between Thailand and Vietnam Similar to Cambodia, Laos is expanding its road and bridge infrastructure, importantly including major new bridges to Thailand (its largest trading partner), which will reduce transport times. One project is the East West Economic Corridor road development, which will connect Thailand to Vietnam through Laos with a modern highway.
There are also a several regional airports now being constructed in areas that are still difficult to access by road, which will allow ease of both business and tourism travel to these area for the first time ever. The country is landlocked and therefore has no major seaports.
The Laos government has also recently approved two massive high speed rail projects, one running north south to China and one running east west from Thailand to Vietnam. However, the investment for the projects is a considerable US$12.2bn, which could double the country’s external debt from the current US$6.2bn, putting significant pressure on the country’s finances. US$5bn in funding for the first railway project has reportedly been secured from New Zealand bank Rich Banco Berhard.
Myanmar has the farthest to go, but could get there quickly Myanmar’s infrastructure needs the most improvement in the region. Although Cambodia and Laos are well behind Vietnam and Thailand, they have both benefited from the presence of foreign investors, overseas financial assistance and the presence of policy banks over the last few decades while rebuilding their infrastructure. Myanmar has really only had renewed access to these resources over the last year. The country still suffers widespread and long duration black outs, and road, rail and port infrastructure all need major improvements.
However, in contrast to the smaller economies of Laos and Cambodia, we expect that Myanmar’s much larger economic promise will drive the interest of; 1) regional and international governments, especially Thailand, China and Japan and 2) a rapidly rising number of major foreign investors, in promoting the rapid development of infrastructure in the country. We believe that the pace of catch up with the rest of Indochina in terms of infrastructure could surprise on the upside.
Myanmar plans to invest US$3.3bn in major road and bridge projects from 2012-2016. Two major port projects are also under development; 1) the US$3.3bn Sittwe Port project, and 2) US$1,000bn for the first phase of the Dawei project. The new ports will be key in allowing countries access to shipping routes through Thailand to Myanmar and then on to shipping routes through the Indian Ocean to the Middle East and beyond, without having to take the long journey down around Malaysia and up through the Straits of Malacca, cutting shipping times and costs considerably.
KT-Zmico Indochina: The Great Integration 24
Manufacturing spreading
0
68.0
136.0
204.0
272.0
340.0
Myanmar Laos Cambodia Vietnam Indonesia China Thailand Philippines
Source: ASEAN
Figure 32: Minimum wage (high end of range)
Room to move up the value chain Thailand and Vietnam show the path of development for manufacturing for the Indochina frontier markets. Both started out with manufacturing bases concentrated reasonably heavily in the low value-added textiles sectors, and have progressively moved their way up to increasingly higher value added industries, including electronics. We believe that the Indochina frontier markets, which all currently have their manufacturing industries heavily concentrated in textiles, can follow a similar path. The early signs of such developments are already occurring in Cambodia and Laos.
Low labour costs for much of Indochina Labor costs remain relatively low in a global context in Indochina, although Thailand’s higher productivity, coupled with government wage regulations, has pushed up its wages to an average US$300/month, reasonably expensive in a regional context. However, the other four Indochina countries still have very low wages in an ASEAN context. The high end of Vietnam’s minimum wage range, at US$112/month is about a third of the Thai minimum, while Cambodia, Laos and Myanmar have recently increased their minimum wages to US$80, US$78 and US$65, respectively. These four especially will continue to remain attractive to manufacturers looking to expand their manufacturing bases in Indochina.
Vietnam continues to see manufacturing investment even with downturn Although foreign direct investment collapsed between 2008 and 2012 in Vietnam, the manufacturing sector has continued to put a floor under FDI over the last two years. The economic downturn may even be supporting manufacturing investment, given that it has held down wages, inflation and the value of the Vietnamese currency. Manufacturers looking for a production base for exports, especially Japanese firms in recent years, continue to enter the country.
Thailand based manufacturers look to Laos and Cambodia Although the manufacturing bases of both Laos and Cambodia are still heavily concentrated in the textiles sector (and especially so for Cambodia), both have seen early signs of diversification. Foreign car manufacturers based in Thailand have recently opened factories in Laos and Cambodia as adjuncts to their Thai operations, suggesting that the success of Thailand-based manufacturers can spill over the borders. China, Korea and Japan are also showing increased interest in Laos and Cambodia as a combination of improving infrastructure and a low cost workforce has made them increasingly attractive destinations for international manufacturers.
Myanmar experiencing a surge in foreign interest We believe that we may see manufacturing in Myanmar, also concentrated in textiles, diversify to other sectors even more quickly than Laos and Cambodia, even though the infrastructure of two latter nations is better developed. The much larger potential size of the market has drawn the attention of regional manufacturers, and since the passing of the foreign investment law in September 2012, three to four major global companies a week have announced their intention to enter Myanmar.
KT-Zmico Indochina: The Great Integration 25
Early stage consumer markets
0
2,200
4,400
6,600
8,800
11,000
Malaysia China Thailand Indonesia Vietnam Laos Cambodia Myanmar
Source: IMF
Figure 33: Purchasing power (Nominal GDP/capita, US$)
Indochina developing large, early stage consumer marketIndochina’s effective consumer market has more than doubled in the last ten years. In the mid 1990s, the only developed consumer market was Thailand (with a current population of 64.5mn), but Vietnam has added 90.4mn consumers over the last decade. With Myanmar, Cambodia and Laos now in the nascent stage of a developing modern consumer market, the consumer market in Indochina will rise to 240.6mn within the next decade.
Thailand has booming consumer market Thailand’s consumer market development has moved well beyond just the capital city, which is blanketed with modern shopping and entertainment complexes supplying almost any consumer item up to the highest luxury goods. Most provincial cities now also have modern shopping malls, big box retailers, hypermarkets, and convenience stores, marking a significant change from just twenty years ago. Traditional retail also continues to exist in parallel with the modern markets, as incomes have grown, with GDP/capita at US$5,678 as of 2012.
Vietnam to eventually become the largest consumer market Vietnam’s consumer market is somewhere in between highly developed Thailand and the frontier markets. Its GDP/capita is about 27% the level of Thailand, and therefore purchasing power remains much lower on average, especially in rural areas. However, twenty years ago, the urban rural gap was similarly wide in Thailand, and yet for the last several years the big consumer growth story has been concentrated in Thailand’s provincial cities. As GDP/capita and purchasing power for the Vietnam consumer continues to rise, and given that it has Indochina’s largest population, it is destined to become the region’s largest consumer market.
Indochina frontiers’ nascent consumer markets The consumer markets in Cambodia and Laos are still in their very early stages, although both have a small number of modern shopping malls, supermarkets, convenience stores, some foreign-branded quick service restaurants and a handful of luxury goods retailers in their largest cities. However, big box retailers have yet to enter the market, and given the massive growth of these retailers in Thailand over the last twenty years, especially in provincial areas, we expect that this format will also prove popular eventually in Cambodia and Laos.
Myanmar sees wave of new entrants jockeying for early positioningThe market in Myanmar is expected to be sufficiently large that is has attracted many foreign consumer entrants that might be bypassing Cambodia and Laos currently because of their relatively smaller size. Several quick service restaurants, hotel chains, non-alcoholic and alcoholic beverage companies, and a convenience store chain have all announced that they will enter Myanmar in the next year. We expect that we may see a more rapid growth of the availability of foreign consumer brands in Myanmar compared to Cambodia and Laos as new entrants vie for an early strong position in the former, whereas they may hold back until the two latter frontier markets gain in size.
KT-Zmico Indochina: The Great Integration 26
Thailand: Indochina’s Future, Today
The promise of the other Indochina countries realizedThroughout this report we have raised Thailand as the model towards which the other Indochina countries are headed. Taken in a global context, there are considerable parallels between Thailand and its immediate region, in terms of culture, religion and and type of natural resources. Although there are differences in political systems, all the countries have embraced a market economy and foreign investment to a large degree. All these factors suggest to us that it is only a matter of time before we see Thailand’s path of economic success travelled by the other countries in Indochina.
Leading global agricultural powerThailand has capitalized on its sustainable natural advantage in agriculture, introducing modern techniques and technology to become a leading global exporter of rice, rubber and seafood (to the point where local scientists have become world authorities on agricultural issues like shrimp disease). Although government policies to subsidize rice prices well above global market prices have reduced rice exports in recent years, we believe that the long-term picture for agriculture overall remains very strong, and the country is expected to continue to improve agricultural yields.
Continues to build on industrial strength Thailand has become a preferred hub for international manufacturers seeking a well educated and trained, but reasonably low cost, labour force. The country’s manufacturing base has moved up the learning curve from concentration in low value added textiles in the 1980s to a focus currently on the automotive and electronics sectors. The country has also developed sizable oil refining, coal, hydroelectric, steel and cement industries.
Services success, including tourism The services side of Thailand’s economy is also increasingly well developed, with all types of industrial, business, and consumer services ubiquitous. One of the largest components of the services sector is tourism, which comprises about 9% of GDP. The country continues to build on its strengths in this sector, from its now well developed southern islands, to popular historical attractions countrywide.
Financial system back to full strength The country’s financial system has come a long way from the 1997 crisis, with a strong banking system now compliant with international accounting standards. The central bank has undertaken prudent monetary policy and maintained a stable currency and low inflation for many years. The country also has active equity, bond and futures markets, and the process of gaining investment exposure to the market is the easiest in Indochina for foreign investors.
Already has large developed modern consumer market Thailand has Indochina’s largest consumer market in value terms currently, with all forms of modern retail, including shopping malls, cineplexes, hypermarkets, supermarkets, big box retailers and convenience stores now having penetrated well beyond Bangkok to all the provincial cities, and most large towns to some degree.
The big story for growth in recent years has been focussed more in the provinces, as development there starts to catch up with the larger cities. The market for bigger ticket items is also large, with Thailand unique in having a large automobile and truck market when the bulk of the vehicle purchases in the other Indochina markets are still motorcycles.
Most modern infrastructure in IndochinaThailand has the most modern transport infrastructure in Indochina. This comprises a well developed road system to all regions of the country, including major toll roads and expressways, several large active ports, an international standard airport in Bangkok and airports at all major provincial cities, and a rail system that is currently undergoing a major renovation to high speed rail. In terms of energy infrastructure, Thailand has the most extensive electricity grid in Indochina, and sufficient hydroelectric and reservoir capacity to curb the blackouts that continue to plague especially the three Indochina frontier markets.
KT-Zmico Indochina: The Great Integration 27
Thailand: Avenues for Investment
Our top picks in the equity marketsInvestors can gain exposure to Thailand through the Stock Exchange of Thailand, which provides a wide variety of potential sectors for investment. The current top picks from our Thai Research Team (Head of Research: Thanomsak Saharatchai), are:
Bangkok Bank to gain on upturn in investment cycle (Price Bt221, Target Bt275, Analyst: Prapharas Nonthapiboon) We believe that Bangkok Bank (BBL) will be a key gainer from the ongoing upturn of Thailand’s investment cycle. We expect BBL to be the best positioned among Thai banks to capture opportunities overseas, as it has the largest overseas branch network and loan exposure. BBL’s financial position is the healthiest of the Thai banks and it trades on a 2013E P/BV of 1.4x, inexpensive vs. 1.9x for Thai banks and 1.6x for regional banks. CK profits continue to turn around (Price Bt26.75, Target Bt33.00, Analyst: Raenoo Bhandasukdi) We expect normalised profit for contractor CK continue to turn around in 2013-14E from revenue growth and lower SG&A expenses to sales. Earnings contributions from affiliates (dividend income & profit sharing) are still intact despite a reduced investment stake in TTW. The shares are still trading at +1SD of historical P/BV, compared to peers (ITD and STEC) of +3-3.5SD. We have a target of Bt33 based on SOTP, and we risk to the upside for the valuation of CKP.
ITD on shortlist for water management and flood protection projects (Price Bt8.30, Target Bt8.40, Analyst: Raenoo Bhandasukdi) We expect contractor ITD’s normalized profit to continue turning around in 2013-14E from revenue growth, a stable gross profit margin, and lower SG&A expenses to sales. The company is one out of three on a shortlist for water management and flood prevention projects with a combined value of Bt290bn, with the result to be announced in 2Q13. Progress on the Dawei project would ease the company’s investment burden. We have a target price of Bt8.4/share based on 4x P/BV (+3SD).
STEC’s strong balance sheet adds leverage in contract bidding(Price Bt26.50, Target Bt33.00, Analyst: Raenoo Bhandasukdi) We expect that the company’s strong balance sheet will support the potential to win more construction contracts. STEC also has substantial cash on hand that will enable the company to manage working capital and profitability. We have a target price of Bt33 based on 34x PER (+2SD), and an implied 7x P/BV, 2003’s peak level.
Upside potential from booming rural economic growth (Price Bt.27.75, Target Bt33.00, Analyst: Waraporn Wiboonkanarak) Strong 1Q13 earnings (up 59.5% yoy) confirm Singer’s bright outlook, with favorable business opportunities along with booming rural economic growth and the upcoming AEC. An increasing chance of a domestic policy rate cut will be a psychological near-term share price catalyst. We maintain a BUY recommendation with a target price of Bt33 (WACC 9.8%, terminal growth 3%), implying a 2013E PER of 21x.
PTTGC expected to see strengthening H2/13(Price Bt74.50, Target Bt88.00, Analyst: Patcharin Karsemarnuntana) Given its solid 1Q13 net profit and expected strengthening H2/13E earnings on solid polymer spreads and a bounce back of GRM (when entering the Indonesian Ramadan month in August), we expect 2013-14E net profit to grow at 3% CAGR. With its current undemanding valuation of 1.3x 2013E PBV (close to -1SD) and its competitive advantage as a gas-based producer, we retain our BUY rating (13E TP : Bt88) and still prefer PTTGC as our top pick among the downstream players.
THAI benefits from rising tourist arrivals, currency gains (Price Bt32.00, Target Bt35.00, Analyst: Raenoo Bhandasukdi) Thailand’s tourist arrivals grew 19% in Q1/13, mainly from driven by Asia-Pacific countries. THAI’s fleet retrofit and expansion are expected to increase competitiveness in the longer term. The baht has strengthened compared to Euro and Yen and will enable THAI to book FX gains. A trend of lower global oil prices could pose upside risk. The share price is still trading at a 2013E P/BV of 1.0x, vs. 1.2x for regional peers.
KT-Zmico Indochina: The Great Integration 28
Vietnam: Cyclical downturn masks strength
Cyclical difficulties for Indochina’s eventual largest market Vietnam is currently experiencing a major cyclical downturn, which we believe will continue through 2013, and very likely weigh on growth through much of 2013. Vietnam was recently the only Indochina country to face downgrades of real GDP estimates for the next two years by the IMF. However, we believe that the short to medium-term downturn masks major underlying strengths and strong secular trends in what is eventually to become Indochina’s largest economy.
Fallout continues from over investment in real sector during boom time Vietnam went through a major credit and FDI boom until 2008, that led to over investment concentrated especially in the real estate and the building materials sectors. Projects undertaken during this boom continue to come to the market, although demand has collapsed considerably versus entrepreneurs’ original expectations. This has led to rising bad debts at banks, which in turn has prompted banks to pull back on lending, which led to difficulty in accessing credit even for some strong businesses. Economic growth has declined continuously over the last six years from a peak in 2007 above 9% to the most recent Q1/13 print just below 5%.
Growing pains continue for the financial systemWe believe that resolving troubles in the financial system will take considerable time to work out, and difficulties in the sector will persist into 2014. First, the true extent of the non-performing loan (NPL) problem is still not known to the market. Current estimates range from 6% to 10%+ of system-wide loans, yet the major banks are still reporting NPLs under 3%. That the State Bank of Vietnam (SBV) has delayed an introduction of more conservative NPL classification, with the expectation that it would lead to a doubling in NPLs, is a major concern.
VAMC not a panacea, and credit growth still slow The Vietnam Asset Management Company, (VAMC - designed to absorb the bad loans in the system off of banks’ balance sheets), continues to be delayed (the most recent target start date is July 2013), and under its current guidelines, we do not expect it to be a panacea for the industry. To what degree banks will buy into VAMC is also unclear as it will shine a glaring light on the true state of their loan books. Also, although the SBV continues a major rate cutting cycle started in early 2012, it has also limited credit growth to a maximum of 12% for even the strongest banks this year, which guarantees muted loan growth in 2013.
Industrial sector facing stagnation The industrial sector is facing major stagnation, with the real estate sector, steel and cement sectors all currently facing severe oversupply, even as new capacity in these industries continues to grow. Key measures of the industrial growth, including the index of industrial production, and the purchasing managers index are only showing the slightest hints of expansion in early 2013, and we believe that it is too early to extrapolate a recovery.
Already a market leader in agriculture Vietnam has already become a market leader in global agriculture, becoming the number two global rice and coffee exporter (and could feasibly usurp number one coffee producer Brazil in the next few years). However, short-term difficulties have hit export growth in early 2013, with drought hitting the coffee industry over the recent growing season, and rice export growth falling yoy in Q1/13. Although the secular long-term trend is still intact, agricultural growth has not been sufficient to offset declines in the other sectors of the economy so far this year.
Indochina’s largest consumer market long termAlthough the short-term outlook for Vietnam is weak, the long-term story for the country remains strong. The country has Indochina’s largest population, which is still very young and becoming increasingly well educated and trained, and is destined to become the region’s largest consumer market. This is backed up by the major ongoing overhaul of infrastructure, and low, but stabilizing levels of foreign direct investment. The government has already begun putting the brakes on new capacity in the real estate and building materials sectors to rebalance supply and demand, although this could take several years.
KT-Zmico Indochina: The Great Integration 29
Vietnam: Avenues for Investment
Short to medium term outlook for equity market bearishVietnam has a developed equity market and it is the easiest way for investors to gain exposure to the country. However, most of the liquidity in the market is in the top ten stocks, which account for over 60% of the market capitalization. As we continue to build up coverage on these ten stocks, we have examined the consensus estimates for the top ten and concluded that they (and by extension the Vietnam market) still have substantial short to medium-term risks at current levels that may not be fully taken into account by consensus figures (see our recent report, Vietnam Value: Headwinds, for more detail).
Secular growth story still intact for longer-term investors However, we do believe that the underlying secular story for Vietnam is still robust, driven by strong demographic trends increasing the size of Indochina’s largest potential labour force, along with continued productivity gains. Investors with a horizon beyond two years may find some bargains, especially among the less liquid mid and small caps names in the market.
Top ten has high concentration in financial sector The top ten is concentrated in the financials sector, with four commercial banks; Vietcombank (VCB - US$3.1bn market cap), Vietin Bank (CTG - US$2.3bn), Sacombank (STB - US$1.1bn), Exim Bank (EIB - US$0.8), and insurer Bao Viet Holdings (US$1.6bn), accounting for 34% of the top ten market cap. We believe that the commercial banks pose the highest risk to market earnings this year.
Consensus forecast for major banks do not accurately reflect risk, in our viewConsensus forecasts for the four banks indicate only a small rise in provisions to loans although non-performing loans for the top four banks have more than doubled since early 2011. The operating income for these banks continues to deteriorate, falling 16% in Q4/12. For financial holding company Bao Viet Holdings, the market expects earnings declines this year in its core insurance business, and it is marginally exposed to the potential for rising NPLs through a commercial banking subsidiary.
Real sector risk lower than for financials, but still a concern While the big risk to the top ten in 2013 lies firmly in the financials sector in our view, we also see downside risk, albeit to a lesser degree, in the five real sector stocks; 1) Vietnam Dairy, the top dairy and milk producer (VNM - with a US$4.9bn market cap), and 2) Masan, the largest soy and fish sauce manufacturer Masan (MSN - US$3.6bn market cap) 3) Petrovietnam Gas (GAS) (US$4.9bn market cap), 4) Petrovietnam Fertilizer and Chemicals (DPM - US$786mn market cap), 5) high-end property developer, Vingroup (VIC - US$2.8bn market cap).
Strong consumer stocks already priced for success Consumer food stocks VNM (the milk and dairy products market leader) and diversified firm MSN (a market leader in both soy and fish sauces) have benefited from industry growth and large market share gains. Although the market expects strong continued earnings growth for the two in 2013, with; 1) VNM’s revenue up 23% and net income rising, while 2) Masan’s revenue and net earnings are targeted to rise 31% and 167%, respectively, much of this already appears to be reflected in high current multiples.
Fertilizer producer and property developer VIC face difficult industries DPM has faced a doubling of domestic capacity for its key product, urea, since 2012, and the current consensus forecast looks for a 22% decline in revenue and a 28% fall in earnings for 2013. High-end property developer Vingroup (VIC), in contrast, is expected to outpace a weak sector, with consensus forecasts for 127% revenue growth and 232% net income. We expect, however, that there could be downside to these estimates as property rental rates and selling prices continue to decline.
No big drivers for natural gas monopoly Natural gas monopoly Petrovietnam Gas enjoyed a major rebound in production growth from a trough -21% yoy growth in November 2011 to peak a year later in November 2012 at 28%. However, production growth has contracted to an average 11% over Q1/11, with average selling prices up just 5% for the quarter. The market expects that the company will generate 8% revenue growth this year, while earnings will fall 1%, as GAS continues to spend on new investment.
KT-Zmico Indochina: The Great Integration 30
Laos: The Pint-Sized Tiger
Laos’ economy is small, but diversified In our view, of the three Indochina frontier markets, from the standpoint of political stability, prudent management of the financial system and diversification of the economy across several sectors, Laos is the strongest market by far. Its key limitation is its small size, with a GDP of only US$9.2bn. Pound for pound, Laos could be considered the lowest risk, highest growth bet in Indochina.
The most politically stable of the Indochina frontiers Laos has been ruled the People’s Revolutionary Party since the mid-1970s, and has seen particular stability since the 1990s when end of the cold war relieved much political tension among neighbors, China, Vietnam and Cambodia. In contrast to Myanmar, or even Cambodia, there appears to be little active dissent against the current regime.
Prudent central bank and well diversified economy The country also has a particularly prudent central bank (The Bank of Laos), which has limited money supply growth, which in turn has held down inflation and lead to currency appreciation. The country also has developed a diversified, balanced economy, with large contributions to GDP from agriculture, hydropower, mining, textiles manufacturing and tourism. This compares favorably to neighbor Cambodia, which has the majority of its industrial GDP concentrated in the textiles sector.
The battery of the region Laos is undertaking a massive build out of hydroelectric capacity over the next decade, from 3,400MW from 23,000 MW (based on all projects for which MoUs have already been signed) well in excess of domestic requirements, and is expected to become the ‘battery‘ of the region. Laos is already exporting electricity to Thailand, which has signed agreements for large energy purchases from Laos hydroelectric dams to be completed in the future. Given Laos’ lack of fossil fuels, and Myanmar’s abundance of oil and gas, and Myanmar’s underdeveloped electricity capacity, and Laos’ growing strength in this sector, there may be potential for trade in these products between the two countries, which share a small border.
Majoring in miner things Although electricity could become Laos’ largest export of tomorrow, it is currently only 16% of exports, and minerals are its largest export currently, comprising over 50% of the total. The majority of this is copper, coming mainly from two Australian-listed mining companies, MMG Lane Xang and Pan Australian. Laos’ geography points to further development of this industry, and we expect that mining will be a major contributor to GDP and exports over the next decade, especially given high demand from neighboring China versus Laos’ small supply in a global context.
Agricultural strengths relative to its size Although given its small size we do not expect Laos to become a major global agricultural power, like Thailand, Vietnam, Myanmar, and even potentially Cambodia, the country does possess some unique agricultural strengths. At current consumption growth rates, Laos does have the potential to become a rice exporter over the next decade, and it already produces nearly as much coffee as Thailand. Foreign firms have begun to make investment in the sector, suggesting that Laos will be a part of the Indochina agricultural growth scenario over the next decade, even if a small one.
Manufacturing and tourism round out economy The other key sectors in Laos’ economy are manufacturing and tourism. Laos’ manufacturing industry is mainly concentrated in the textiles industry, although there are early signs of diversification of the manufacturing base, including automotive related manufacturing as a support to foreign car manufacturers based in Thailand.
Tourism is still developing in Laos, and in contrast to Cambodia, which has a comparably diversified mix of international arrivals, foreign visitors to Laos come 84% from neighboring countries Thailand (over 50%), China and Vietnam. However, it is currently relatively difficult to access many potential tourist sites in Laos due to limited transport infrastructure, and we expect that its appeal as a destination to visitors beyond these neighbors will grow as infrastructure and marketing of the country as a destination improves.
KT-Zmico Indochina: The Great Integration 31
Laos: Avenues for Investment
Laos Stock Exchange provides easy access to Laos investmentThe Laos Securities Exchange (LSX) surpassed US$1bn market cap this year, and the two listed companies EDL-Generation and Bank Pour Le Commerce Exterieur (BCEL) continue to show strong financial results this year. These two names remain a good way for investors to gain exposure to two of the key stories in Laos, 1) the hydroelectricity expansion, and 2) overall economic growth. For exposure to Laos’ growing mining sector, there are two mining companies listed abroad, Pan Australian and MMG, that make a large proportion of their earnings from Laos.
Improvements in the LSX and new listings expected this yearThe LSX is expected to see some key improvements this year. First is the arrival of global custodians to the market, the absence of which prevents many large institutions from investing in Laos. Other developments include a move to continuous trading once a third company lists, and block trading by Q3/13.
There are also several listings planned over the next twenty-four months that should improve the breadth of sector offerings on the market, as well as help boost liquidity. These include; 1) coffee producer and exporter Dao Coffee, 2) telecom ETL, 3) Laos Airlines, 4) Lao Cement, 5) Laos Development Bank, 6) cassava producer Laos Indochina Group, 7) Laos Telecom 8) diversified conglomerate Laos World Group, and 9) oil distributor Petrotrade.
EDL-Gen a play on hydroelectric expansion: BUY (Price US$0.9, Target US$1.1, Analyst: Patcharin Karsemarnuntana) EDL-Generation (EDL-Gen) operates power plants privatized by state-owned electricity firm Electricity Du Laos (EDL). The company is a direct play on Laos’ planned massive hydroelectric expansion, from 2,600 MW as of 2011 to a potential capacity above 23,000MW by 2020, according to current power development plans. EDL-Gen plans to expand its capacity nearly threefold from 881MW as of 2011 to 2,387MW by 2020.
We still see room to move in EDL-Gen, with the price at US$0.9/share currently, implying 23% upside to our target price. The company trades on a fully diluted P/E of 9.4x and P/B of 1.4x, and still offers a strong 8.0% yield for 2013E.
Largest bank, BCEL, rides rapid economic expansion: BUY (Price US$0.9, Target US$1.4, Analyst: Prapharas Nonthapiboon) Bank Pour La Commerce Exterieur (BCEL) is the country’s largest bank by loans. The bank saw strong lending growth in Q1/13 and continues to ride Laos’ rapid economic expansion, as the key lender for large corporates. At the current price of US$0.9/share,. BCEL trades at a 45% discount to our US$1.4/share target, is a P/E of 3.9x and P/B of 3.3x and offers a dividend yield of 12.1% for 2013E.
For more detail on these stocks and the LSX, please see our Laos Market Update dated January 10, 2013, and our recent reports on EDL-Gen and BCEL.
Exposure to mining sector through MMG and PanAust Investors can also gain exposure to the mining sector in Laos, especially for the country’s largest single export, copper, through two Australian-listed miners that are major stakeholders in the biggest copper and gold mines in the country:
1) MMG Lane Xang Minerals: The company generates nearly 50% of its EBITDA from its Seppon mine in Laos, which produced 86k tonnes of refined copper in 2012 and 70k ounces of gold.
2) Pan Australian: Operates; i) the Phu Kham mine, which produced 63k tonnes of copper concentrate in 2012, 59k ounces of gold and 469k ounces of silver in 2012, and ii) the Ban Houayxai mine, which produced 76k ounces of gold in dore and 146k ounces of silver in dore last year.
KT-Zmico Indochina: The Great Integration 32
Cambodia: A Work in Progress
Similar long-term potential to Laos and Myanmar Cambodia has similar potential in the long-term to resource rich Laos and Myanmar, with estimates of significant fossil fuel and mineral reserves, as well as rivers to power hydroelectric dams. However, where Laos and Myanmar have already delivered on this natural resource promise, with material electricity and gas exports, respectively, already underway, for Cambodia these industries are still in the very early stages. Exploration of potential fuel and mineral reserves has yet to produce any major finds, and any extraction of natural resources will be many years away. Cambodia is in the process of expanding its hydroelectric grid, but this is still very early in the process.
Industrial sector heavily concentrated in garment manufacturing The lack of a developed resource sector has kept Cambodia over concentrated in a few key industries; agriculture, garment manufacturing and tourism, in contrast to the much more diversified economies of Myanmar and Laos. Textiles comprises over 60% of the industrial component of GDP and is between 65%-90% of Cambodia’s total exports (depending on data source).
Some diversification, but exposure to garment industry remains a riskAlthough there are early signs of some diversification of the manufacturing base with car assembly and electronic components factories opening, garment manufacturing will continue to be the largest component of manufacturing for years to come. This industry is volatile, both as the manufacturers themselves can rapidly relocate between countries based on wage differentials, but also because of the high cyclicality for the final product. The country exports garments mainly to the EU and the US, two regions currently experiencing economic weakness.
Agriculture promise with clear land titles being established Cambodia agriculture has significant promise, and the country could feasibly become an important global exporter of rice and other products over time. However, major capital has only begun to enter the sector in the last few years, due to a lack of collateral, including land titles. The land title issue is particular to Cambodia in Indochina, with most records destroyed in the 1970s civil war. This left farmers unsure of the ownership of the land they cultivated, discouraging investment in farming equipment or irrigation.
However, there has been a major push over the last year to establish clear rural farm titles which has appeared to be successful and in favor of the average small farmer. We expect that this will help drive both consolidation of agricultural land into larger modern farms (much agriculture is still subsistence level in Cambodia), as well as allow farmers to use the land deeds as collateral to get loans to increase investment in their land.
Tourism revenue at 15% of GDPCambodia’s tourism industry revenue is about 15% of GDP, the highest ratio for this sector in Indochina. Tourism numbers continue to grow at above the long term average of about 19%/annum in recent years, and with the country perceived as increasingly safe, becoming more well known globally, and given improving airport and road infrastructure, we expect that this strong organic growth will continue.
Tourism is highly geared to the World Heritage site Angkor Wat, which accounts for nearly 50% of arrivals, but other areas of the country, including virtually untouched islands on the south coast and ecotourist sites, are expected to be developed in the next decade. The industry still carries risk though, in that it is exposed to an economic slowdown in its top sources of foreign arrivals; Vietnam, Korea, China, and Laos.
Risks on the way to diversification Cambodia has great promise, and we believe that it could surprise on the upside substantially if it is able to develop its oil, gas, and mineral resource industries, which could lead to an economic composition similar to Laos (with fossil fuel strengths substituting for hydroelectric capacity). However, given that a significant contribution to GDP from these industries may be a decade away, there are still risks on this path, especially with so much of the country’s export revenue geared to the retail clothing purchases of over indebted EU and US consumers facing flagging economies.
KT-Zmico Indochina: The Great Integration 33
Cambodia: Avenues for Investment
Market off to a slow start with single listing stagnating The Cambodia Stock Exchange has been open for over one year, but still has only a single listing, Phnom Penh Water Supply Authority (PPWSA) PPWSA has stagnated, holding in a tight range between KHR6,100-KHR6,300 (the latter figure was the IPO price), since early September 2012. The US$142mn market cap of PPWSA is tiny for international investors (and only 10% of this is free float) and more listings are needed to reach critical mass.
Although PPWSA is a strong company, it trades at multiples considerably above the regional average for water utilities based on management forecasts. Also, the water utility is nearing total coverage of its Phnom Penh target service area, which will act as a constraint on growth, and there have been no plans yet announced regarding expansion to other municipalities.
More listings needed to reach critical mass Cambodia needs more listings to increase liquidity in the market, and give the market critical mass, especially for institutions; right now, the reasonably onerous account set up process is not justified for the average foreign institution given the single small listing. The next planned listing is the Taiwanese garment factory Grand Twins International, slated for 2013, and another garment factory is expected to follow this year. Given the vagaries and volatility of this industry, we do not view these as the ideal choices for the next listings, but they will give some breadth to the market.
SOE listings still in the pipeline The originally planned second and third listings, state-owned enterprises (SOEs) Telecom Cambodia (TC) and Sihanoukville Autonomous Port (SAP), are still in process. In contrast to PPWSA, which was well prepared for its listing in regulatory terms, TC and SAP are still working with consultants to get their accounts to the standard required by the Securities and Exchange Commission of Cambodia. Although both were originally planned to list last year, at this point even a 2013 listing for either company may prove aggressive.
Several other potential listings, but no timelines yet There are many other interesting companies that could list in Cambodia in the next few years, but we will likely need to see further development of the market before they do so, and no (even tentative) timelines have been set. They include; 1) the country’s largest bank ACLEDA, which has stated on its website that it intends to list; 2) Ezecom, a leading internet provider, with a countrywide fibre network, and 3) Mobitel, a leading wireless telecom. However, investors can gain exposure to other sectors in Cambodia, similarly to Laos, through foreign listed names.
Nagacorp a play on tourism growth in the capital city Nagacorp is a Hong Kong listed company whose main holding is Nagaworld Casino and Resort, which has a monopoly on gambling for a 200km radius around the capital city, Phnom Penh. The company is a play on growing tourist arrivals to the capital, and last year announced a major planned expansion of its business.
Mining companies with Cambodia exposure There are several foreign listed mining companies that have Cambodia exposure, suggesting that capital for mineral resource exploration continues to rise. However, in contrast to Laos there are no mines in the extraction phase in the country.
1) Brighton Mining (Australia): 100% of its business is in Cambodian gold exploration
2) Angkor Gold (Canada): 100% of its operations are in Cambodia gold exploration
3) Southern Gold (Australia): Undertakes Cambodia gold exploration in addition to its Australian gold exploration
4) Indochine Mining (Australia): Undertaking gold exploration in Cambodia as well as Papa New Guineau.
5) Renaissance Minerals (Australia): Has its main tenements in Australia, but is also exploring for gold in Cambodia.
KT-Zmico Indochina: The Great Integration 34
Myanmar: Indochina’s Biggest Surprise
The land of potential upside surprises Of the three frontier Indochina markets, we believe that economic growth for Myanmar has the highest chance for upside surprises over the next several years. The country ended 2012 in a radically different economic and political state than it started the year, with major new reforms enacted, sanctions by many nations lifted, and a key foreign investment law (FIL) passed in September 2012. Myanmar has also recently seen material debt forgiveness (especially by Japan), the return of major policy banks to the country, and the increased access to lending and official development assistance that this entails. All these changes have freed Myanmar up for several potential boom years from 2013 onwards.
Foreign business law paves way for potential surge in FDIAlthough there had already been increasing interest from foreign companies from the middle of 2012, passing the FIL has increased clarity enough that is has generated a surge in global corporate interest in the country. We have seen an almost daily stream of announcements over the last quarter of large regional and international firms planning to enter the country, which we believe will translate into a surge in FDI, which in Myanmar has historically been tiny as a percentage of GDP compared to other ASEAN countries.
Insufficient supply in most industries suggests major opportunities Major supply constraints exist in nearly every major industry, leaving the market wide open for capital, and the Myanmar government is actively encouraging such investment for the first time in 30 years. Every industry in which Indochina has shown a competitive advantage also has major development potential in Myanmar; as it combines all of Indochina’s ‘greatest hits’ into one country, and on a reasonably large scale, global corporate and investor interest in the country appears justified.
Indochina’s ‘greatest hits’ all in one countryMyanmar has potential to develop; 1) agriculture, especially for rice, as is common to all Indochina countries, but could also be a major seafood exporter, similar to Thailand and Vietnam, 2) fossil fuels and minerals, with exploration only really beginning to flourish, and the country already meeting much of Thailand’s natural gas demands, 3) major hydroelectric capacity given extensive rivers, 4) manufacturing, which although focussed mainly in textiles is likely to see increased diversification, 5) tourism, given a long coastline, islands and many historical sites, and 6) a large consumer and labour market given a similar population level to Thailand.
Agricultural industry has major potential Myanmar was once the world’s largest rice exporter, and given production of 33mn tonnes, and exports of just 445k mn tonnes in 2010 with a similar population to Thailand, which produced 31mn tonnes, but exported 9mn tonnes in that year, we see room for massive rice export expansion from Myanmar, especially given that agriculture and milling capacity has seen limited development for the last four decades. The country’s long coastline could drive its seafood industry, and given the long north to south latitude, and varying climate and geography, similar to Thailand and Vietnam, it is able to cultivate a wide variety of crops.
A major potential source of fossil fuels for Indochina Myanmar’s current proven fossil fuel reserves (natural gas of between 7.8trn-22.5trn cubic feet and oil reserves of only 50mn barrels) are generally not believed to reflect the true extent of the country’s oil and gas resources. Some estimates put the the country’s oil reserves as high as 3.2bn bbl, (a 48.5 year reserve life), and natural gas reserves as high as 89.7trn cubic feet (a 199 year reserve life). We view the probability for major new oil and gas finds in Myanmar as the highest in Indochina.
We expect the country to play an increasingly key role in regional energy supply. Myanmar is already a major source of natural gas exports to Thailand, and a major new oil pipeline to China is expected to be operating by mid-2013. The country could also eventually export oil to Laos (with which it shares a small border) and Cambodia, which both currently import all of their fossil fuels.
KT-Zmico Indochina: The Great Integration 35
Myanmar: Avenues for Investment
Equity market planned for 2015Myanmar still remains relatively difficult to access for investors, with even basic transactions like getting cash into banks reasonably laborious. Although there is a small over-the-counter equity exchange with a handful of firms, it has very low liquidity and is not open to foreigners. However, there are plans for a modern equity market, with the target date for opening in late 2015. This date does appear aggressive given that the Securities Exchange Law is only expected to pass in July this year. However, given the country’s track record over the last two years of driving through radical reforms in a short time, it may be achievable.
Companies already targeting listing Two firms already are already targeting listing. One, private bank Asia Green Development Bank, has gone through the first two steps towards listing; the first being approval by central bank, and the second approval from the Directorate of Investment and Company Administration. This shows that there is an existing framework for firms to start preparing themselves for an eventual listing. The government has also indicated in recent months that state-owned Myanmar Post and Telecommunication would be listed as Myanmar Public Telecom, with the company to capitalize on a mobile telecom market in its very early stages. Gaining exposure through Myanmar-focussed foreign listings Still, with the launch of this market still more than two years away, and the potential for valuations to expand considerably over this period, we would direct investors towards some foreign-listed companies that have growing exposure to this market. These include Singapore listed firms, with most of their operations in Myanmar; 1) diversified conglomerate Yoma Holdings, 2) oil and gas exploration firm Interra Resources, and 3) pulp and paper company UPP holdings. There are also two Thailand-listed firms with some exposure including PTTEP, with oil and gas operations in the country, and Italian Thai Development, which is developing the Dawei Port Project.
Yoma Holdings offers multi-sector exposure to Myanmar Yoma Holdings offers the broadest exposure to Myanmar of all these foreign listed firms. Its main divisions comprise; 1) its core residential high-end property development business, 2) a retail business which will open a department store through a joint-venture with Singapore’s Parkson Retail, 3) an agricultural plantation business that cultivates black pepper and plans to diversify into other spices, rubber and eucalyptus, and 4) a vehicle distribution business with cars and trucks imported from China’s Dongfeng Automobile Company.
Interra Resources focusses on oil and gas exploration Interra Resources undertakes oil and gas exploration in both Myanmar and Indonesia. It has a 60% holding of two of Myanmar’s major oil fields, Chauk and Yenangyaung with contracts running until 2017. The company is already extracting oil in both Myanmar and Indonesia and has been profitable for the last several years. Myanmar’s contribution to Interra’s earnings is substantial, accounting for about 60% of revenue and over 80% of EBITDA.
UPP Holdings operates in the pulp and paper business Singapore based pulp and paper company UPP Holdings does not yet have the majority of its earnings contributed by Myanmar as do Yoma and Interra, but its strategy is to focus on Myanmar as its major growth market for the future. So far this has consisted mainly of signing two Memorandums of Understanding with the Myan Shwe Pyi Group, one in in May 2012 to establish a granite quarry and another in October 2012 to build a 50MW power generating plant in Yangon.
Thailand’s PTTEP and ITD earnings contributions from Myanmar could grow Thailand’s state oil company PTTEP already exports gas to Thailand from Myanmar’s Yadana and Yetagun fields, it has three promising offshore blocks under exploration and it is bidding for new onshore blocks. However, Myanmar still contributes only a small proportion of the company’s revenue. ITD does not have any major earnings contribution from Myanmar currently, but it is the main contractor behind the massive Dawei port project, and could see Myanmar become a large proportion of the firm’s revenue. However, the Dawei project has faced delays as sourcing funding has been difficult and the Thai and Japanese government backers face some disagreement on the direction of the project.
KT-Zmico Indochina: The Great Integration 36
Disclaimer
This document is produced using open sources believed to be reliable. However, their accuracy and completeness cannot be guaranteed. The statements and opinions herein were formed after due and careful consideration for use as information for the purposes of investment. The opinions contained herein are subject to change without notice. This document is not, and should not be construed as, an offer or the solicitation of an offer to buy or sell any securities. The use of any information contained in this document shall be at the sole discretion and risk of the user.
KT ZMICO RESEARCH - RECOMMENDATION DEFINITIONS
STOCK RECOMMENDATIONS
BUY: Expecting positive total returns of 15% or more over the next 12 months
TRADING BUY: Expecting positive total returns of 10% or more over the next 3 months
SELL INTO STRENGTH: Expecting total returns of not more than 10% over the next 3 KT ZMICO RESEARCH - RECOMMENDATION months; share price has largely priced in fundamentals
BUY ON WEAKNESS: Expecting negative total returns of not more than -10% over the next 3 months, while expecting positive developments in the medium to longer term
SELL: Expecting negative total returns of 15% or more over the next 12 months
SECTOR RECOMMENDATIONS
OVERWEIGHT: The industry, as defined by the analyst’s coverage universe, is expected to outperform the relevant primary market index by at least 10% over the next 12 months.
NEUTRAL: The industry, as defined by the analyst’s coverage universe, is expected to perform in-line relevant primary market index by at least 10% over the next 12 months.
UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index by 10% over the next 12 months.
